Relevant Cost: Cincinnati Flow Technology (CFT) Buy or make?
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Were the analysis prepared by Cincinnati Flow Technology's engineering, manufacturing, and accounting departments and their recommendation to continue purchasing the pumps correct? Explain your answer and include any supporting calculations you consider necessary.
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Solution Summary
The guidance includes an analysis in excel and some instructional notes. The recommendation is to continue buying the pumps up to a certain price level. Reasons are given.
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Problem posted:
Relevant Cost Assignment
Cincinnati Flow Technology (CFT) has purchased 10,000 pumps annually from Kobec, Inc. Because
the price keeps increasing and reached $102.00 per unit last year, CFT's management has asked for an
estimate of the cost of manufacturing the pump in CFT's facilities. CFT makes stampings and castings
and has little experience with products requiring assembly.
The engineering, manufacturing, and accounting departments have prepared a report for management which includes the following estimate for an assembly run of 10,000 pumps. Additional production employees would be hired to manufacture the pumps but no additional equipment, space, or supervision would be needed.
The report states that total costs for 10,000 units are estimated at $1,435,500 or $143.55 per unit. The current purchase price ...
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- BSc, University of Virginia
- MSc, University of Virginia
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