Make-or-Buy
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5-43 Make-or-buy
Tanner Appliance Company manufactures 12,000 units of part M4 annually. The part is used in the production of one of its principal products. The following cost information is available on part M4:
Direct Materials $11
Direct Labor 9
Unit-related support 4
Batch-related support 5
Product-sustaining support 2
Facility-sustaining support 2
Allocated corporate support 5
Total Costs 38
A potential supplier has offered to manufacture this part for Tanner Appliance for $30 per unit. If Tanner outsources the production of part M4, 50% of batch-related and 80% of product-sustaining activity resources can be eliminated. Furthermore, the production facility now being used to produce this part can be used for a fast-growing new product line that would otherwise require the use of a neighboring facility at a rental cost of $20,000 a year.
A. Should Tanner Appliance purchase part M4 from the outside supplier?
B. What costs are relevant for this decision?
C. What additional factors should Tanner consider?
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This explains the Make-or-Buy case for an organization supported by the example
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5-43 Make-or-buy
Tanner Appliance Company manufactures 12,000 units of part M4 annually. The part is used in the production of one of its principal products. The following cost information is available on part M4:
Direct Materials $11
Direct Labor ...
Purchase this Solution
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