Diehl Company - relevant costs; make or buy
Not what you're looking for?
For many years, Diehl Company has produced a small electrical part that it uses in the production of its standard line of diesel tractors. The company's unit product cost for the part, based on a production level of 60,000 parts per year, is as follows:
Per Part Total
Direct materials $ 5
Direct labor 2.20
Variable manufacturing overhead .40
Fixed manufacturing overhead, traceable 2.40 $ 144,000
Fixed manufacturing overhead,common (allocated on the basis of labor-hours) 2.15 $ 129,000
Unit product cost $ 12.15
An outside supplier has offered to supply the electrical parts to the Diehl Company for only $10.65 per part. One-third of the traceable fixed manufacturing cost is supervisory salaries and other costs that can be eliminated if the parts are purchased. The other two-thirds of the traceable fixed manufacturing costs consist of depreciation of special equipment that has no resale value. Economic depreciation on this equipment is due to obsolescence rather than wear and tear. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle.
Required:
1.
Determine the total relevant cost if parts are made inside the company. (Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
Total relevant cost (60,000 parts) $
2.
Determine the total relevant cost if parts are purchased from the outside supplier. (Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
Total relevant cost (60,000 parts) $
3.
What is the increase or decrease in profits as a results of purchasing the parts from the outside supplier rather than making them inside the company? (Input the amount as a positive value. Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
Purchase this Solution
Solution Summary
Your tutorial is in Excel (attached, click in cells to see computations).
Solution Preview
The strategy for make or buy:
Make or buy (outsourcing)
Compare what you can "save" (variable costs and avoidable fixed costs) to what it will cost you to get it from ...
Education
- BSc, University of Virginia
- MSc, University of Virginia
- PhD, Georgia State University
Recent Feedback
- "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
- "Thank, this is more clear to me now."
- "Awesome job! "
- "ty"
- "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Introduction to Finance
This quiz test introductory finance topics.
Basics of corporate finance
These questions will test you on your knowledge of finance.
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.
Production and cost theory
Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.
Learning Lean
This quiz will help you understand the basic concepts of Lean.