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Make or Buy Decisions

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Given the following data, please answer the following:

Total Cost for 50,000 Units Cost per Unit

Direct materials $ 400,000 $ 8
Direct labor 250,000 5
Variable factory overhead 150,000 3
Fixed factory overhead 300,000 6
Total manufacturing costs $1,100,000 $22

1.Assume that the capacity now used to make parts will become idle if the parts are purchased. Should Dana buy or make the parts? Show computations.

2.Assume that the capacity now used to make parts will either (a) be rented to a nearby manufacturer for $75,000 for the year or (b) be used to make oil filters that will yield a profit contribution of $100,000. Should Dana buy or make part EC113? Show your computations.

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1. Assume that the capacity now used to make parts will become idle if the parts are purchased.
Should Dana buy or make the parts? Show computations.

Relevant costs will include direct materials, direct labor, variable factory overhead and fixed factory overhead that could be saved.
Fixed factory overhead that could be saved=150000
Fixed factory overhead that could be saved (per unit)=150000/50000=$3

Direct Materials $8.00
Direct labor $5.00
Variable factory overhead ...

Solution Summary

Solution analyzes the given date to conclude whether to make or buy the parts. Answer is supported by suitable calculations.

See Also This Related BrainMass Solution

Legal and Ethical Decision-Making

GreatestColas is a U.S.-based multi-national corporation (MNC) with operations in the Americas, China, and Europe. As Director of Sales and Marketing, you have successfully led GreatestColas' North American division to record sales, both in terms of volume and revenue. You have surpassed all of the division's goals in terms of gaining market share, brand awareness, and customer loyalty. You are clearly the company's rising star and have been promoted to Divisional Vice-President for Eastern Europe.

Upon your arrival at your new office, you hold a meeting with key leadership personnel to formulate a strategy to meet divisional goals. You are shocked to learn that your operations manager is the son of a prominent local politician, a concession made by your predecessor to obtain the necessary building permits. Additionally, a review of the books shows an accounting mess and reveals that 5% of gross revenues are used for bribes to organized crime to ensure there are no transportation problems. The entire labor force is local and efforts to integrate other nationalities into the workforce have met with wide ranging resistance including walk-outs, work slowdowns, and even workplace violence. There is not a single woman working in the plant.
You have also been made aware of several additional items:

After conducting a walk-through of the plant, you notice that safety guards on equipment have been removed by the employees. They claim that the safety devices slow them down. You also find that the employees are taking three hour paid lunches, and they claim it is an accepted practice. You have less than 1% market share and the operation is just breaking even.
GreatestColas uses large amounts of water in its brewing process. Local environmental groups have begun to raise critical questions about the amount of water, and the handling of effluent discharge from some of the plants. In response to growing criticism from the environmental sector, GreatestColas has decided to move into the water privatization of operations. As its first client, it will provide water purification services to the city where the plant is currently located. This service is needed because of the growing amount of industrial pollution being created. GreatestColas, while also a creator of part of this problem, will realize a substantial profit. To do this will require increasing the cost of clean water by more than 400%. This will affect the citizens of the city, many who will not be able to afford the increased cost. There is opposition at GreatestColas' headquarters on ethical grounds.

GreatestColas has the opportunity to purchase a controlling interest in a small pharmaceutical company. Although this company is based in United States, it conducts most of its research and human trials in developing countries to minimize costs. To date, this company has seen a 200 percent growth in profits over the last two years. According to the analysis by the corporation's accounting department, growth in the same range can be expected over the next five years. The corporation has an opportunity to purchase a controlling share of this new company for cash and stock. The board of directors is quite enthusiastic about the potential new acquisition. However, several groups of employees have begun to raise questions about the ethical concerns of investing in this new company. Although 95% of its research is conducted in developing countries, the products that it produces are used primarily in developed countries such as the United States and Europe. A group at GreatestColas maintains that the corporation would violate its own ethical parameters if it purchased a company of this type. There's nothing in the corporate code of conduct which prohibits the purchase, and the pharmaceutical company at issue has not violated any national or international laws.

As this corporation has continued to grow, the number of facilities in Europe, Asia, Africa, and South America are outstripping the number of facilities in operation in the United States, and the employee population of the corporation has changed dramatically. GreatestColas now employs more people outside the United States than inside the United States. This has prompted the human-resources department to take a critical look at employee benefits being offered by the corporation. Since the majority of our employees are outside of United States there is a growing discussion about implementing a different plan from the current American model. This would mean terminating current pension plans and medical benefits, and moving more toward the international model which is prevalent in most of the world. The company would shift more of the responsibility for medical payments to the individual employee, and offer stock plans in the place of guaranteed pensions. This would reduce our overhead costs to the corporation by $1.5 billion over the next two years. This will also mean that a number of employees currently in the system, but not vested, would lose their pensions and medical benefits, that new employees would not be offered these benefits, and that employees that are currently vested would have their benefits significantly reduced. Many of the workers within our American facilities have begun to protest this potential action and have threatened legal actions against the corporation.

As a major international bottler, the corporation uses huge quantities of agricultural products. Most of the product used in the process for the corporation has been purchased from American and European sources. A small group of well motivated employees were instrumental in creating the purchasing memorandum urging the purchase of Third World commodities directly from the countries themselves and bypassing the tariffs and trade restrictions. Their argument is compelling and would certainly result in substantial cost savings to the corporation, and a significant infusion of capital to several developing countries.

During your weekly conference call with the CEO, you find that the new President of Global Operations is your predecessor and had conveyed that you were inheriting a smooth running operation with nothing but upside potential. In fact, you know you are sitting on a powder keg, and your future with the company hinges on how you handle your new position.


Make a Power Point presentation for submission to the GreatestColas compliance department head in the US.

Include in your presentation the following:

* Summarize the issues you face at the plant.
* Separate legal issues from ethical issues. Explain the difference between the two as well as the legal basis for your position. Differentiate between Western values and local customs and practices.
* Create an action plan for addressing the problems you found.
* Describe how you will implement your plan and the goals you wish to achieve.

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