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Written Assignment Unit 4

This document provides a case study analysis for a vacuum manufacturer considering whether to make or buy engine components. The manufacturer prepared cost data for in-house production versus buying from a third party. A differential analysis shows that manufacturing in-house has lower total costs and higher profitability. While the third-party offer seems good, analysis of direct and indirect costs reveals higher profits from internal production. Therefore, the summary concludes the manufacturer should produce the engines themselves to sell with their vacuums.

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Ahmad Hafez
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Download as DOCX, PDF, TXT or read online on Scribd
67 views

Written Assignment Unit 4

This document provides a case study analysis for a vacuum manufacturer considering whether to make or buy engine components. The manufacturer prepared cost data for in-house production versus buying from a third party. A differential analysis shows that manufacturing in-house has lower total costs and higher profitability. While the third-party offer seems good, analysis of direct and indirect costs reveals higher profits from internal production. Therefore, the summary concludes the manufacturer should produce the engines themselves to sell with their vacuums.

Uploaded by

Ahmad Hafez
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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UNIVERSITY OF THE PEOPLE

MASTER OF BUSINESS ADMINISTRATION

BUS 5110

MANAGEMENT ACCOUNTING

DR. PEGGY JANUARY

Written Assignment 4

Submitted on

Date: December 07, 2021

In this case, the approach should be the differential analysis for making managerial

decisions related to making or buying engines from the third party. The alternative
selected is the one with the most favorable (or least unfavorable) financial impact. The

evaluation includes only those costs that will change if one alternative is selected over

another. (Christine, 2020)

A vacuum manufacturer has prepared the following cost data for manufacturing one of

its engine components based on the annual production of 50,000 units.

Description Cost per Month

Direct Materials $75,000

Direct Labor $100,000

Total $175,000

Annual production: 50,000 units / 12Months = 4166.6  Monthly production works out

to 4166 units.

If the vacuum manufacturer manufacts the engines own themselves, monthly cost works

out as follows.

Direct Materials $75,000

Direct Labor $100,000

Variable factories Overhead $7.5 x 4166 units = $31,245

Fixed factories Overhead $150,000

Sales Monthly $150 per unit x 4166 units = $624,900

If the vacuum manufacturer buys the engines from the third party, monthly cost works

out as follows.

Cost to buy $60 x 4166 units =$249,960


Direct Materials $0

Direct Labor $0

Variable factories Overhead $0

Fixed factories Overhead $150,000 x 75% = $112,500

Variable Cost Alternative Alternative Differential Alternative 1


1 2 Amount is
Cost to buy from $00 $249,960 $(249,960) Lower
outside
Direct Materials $75,000 $00 $75,000 Higher
Direct Labor $100,000 $00 $100,000 Higher
Variable factories $31,245 $00 $31,245 Higher
Overhead
Fixed Cost
Fixed factories $150,000 $112,500 $37,500 Higher
Overhead
Total Costs $356,245 $362,460 $(6,215) Lower
Revenue
($624,900-Total Costs) $268,655 $262,440 Higher

Should the company make or buy the engines?

The offer from the third-party sounds profitable, as the cost of engine is only $ 60 per

unit compared to the $ 150 of selling price. However, if we compare and analyze the

direct costs and indirect costs, we can see that the profit is higher when the engine is

manufactured in-house. As you can see from the table above, Alternative 1 (in-house

production) has lower total cost and higher profitability. Therefore, the vacuum

company should make a business model of manufacturing engines by themselves and

selling the vacuums.


References

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for

Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html

Christine Jonick (2020). Professor (Accounting) at University of North Georgia,

Introduction to Differential Analysis

https://biz.libretexts.org/Bookshelves/Accounting/Book

%3A_Principles_of_Managerial_Accounting_(Jonick)/09%3A_Differential_Analysis/9.

01%3A_Introduction_to_Differential_Analysis

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