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Manufacturing: Make versus Buy Decisions

Fowler Industries produces two bearings: C15 and C19. Data regarding these two bearings follow.

C15 C19
Machine hours required per unit 2.00 2.50
Standard cost per unit:
Direct material $ 2.50 $ 4.00
Direct labor 5.00 4.00
Manufacturing overhead:
Variable* 3.00 2.50
Fixed# 4.00 5.00
Total $14.50 $15.50
* Applied on the basis of direct labor hours.
# Applied on the basis of machine hours.

The company requires 8,000 units of C15 and 11,000 units of C19.

Recently, management decided to devote additional machine time to other product lines, resulting in only 31,000 machine hours per year that can be dedicated to production of the bearings.

An outside company has offered to sell Fowler the bearings at prices of $13.50 for C15 and $13.50 for C19. Fowler wants to schedule the otherwise idle 31,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits).

A. Assume that Fowler decided to produce all C15s and purchase C19s only as needed. Determine the number of C19s to be purchased.

B. Compute the net benefit to the firm of manufacturing (rather than purchasing) a unit of C15. Repeat the calculation for a unit of C19.

C. Which component (C15 or C19) should Fowler plan to manufacture first with the limited machine hours available? Why? Be sure to show all supporting computations.

Solution Preview

Part A
Each C15 requires 2 machine hours per unit. To make the required 8,000 units will require 8,000 * 2 = 16,000 machine hours. That leaves 31,000 - 16,000 = 15,000 machine hours for C19. The company will thus be able to produce 15,000/2.5 = 6,000 units of C19 and will have to buy 11,000 - 6,000 = 5,000 units of C19.

Part B
Even if the units of C15 and C19 are purchased the ...

Solution Summary

This solution looks at a manufacturer which produces two products and the impact of purchasing one product (versus making it).