Written Assignment Unit 4
Managerial Accounting
BUS 5110
Title: Analysis of Make or Buy Decision for Engine Components
By: - Dekamo Fiseha Lomiso
University of People
February, 2024
Introduction
The decision to make or buy components is a critical one for any manufacturing company. This
assignment aims to analyze the case of a vacuum manufacturer faced with the decision of
whether to continue manufacturing its engine components in-house or to outsource production to
a third-party supplier. By evaluating the relevant cost data and conducting a thorough analysis, a
recommendation will be formulated to guide the company's decision-making process.
Cost Analysis
The cost data provided by the manufacturer is as follows:
- Direct Materials: $75,000 per month
- Direct Labor: $100,000 per month
- Variable Factory Overhead: $7.50 per unit
- Fixed Factory Overhead: 150% of direct labor cost per unit
Based on the annual production of 50,000 units, the total monthly cost is $175,000. To determine
the total cost per unit, we need to calculate the variable and fixed factory overhead costs per unit
(Smith & Jones, 2020).
Variable Factory Overhead per unit = $7.50
Fixed Factory Overhead per unit = 150% of Direct Labor Cost per unit
= 150% * ($100,000 / 50,000)
= $3.00 per unit
Total Manufacturing Cost per unit = Direct Materials + Direct Labor + Variable Factory
Overhead per unit + Fixed Factory Overhead per unit
= $75,000 / 50,000 + $100,000 / 50,000 + $7.50 + $3.00
= $1.50 + $2.00 + $7.50 + $3.00
= $14.00
Decision Analysis
Now, let's compare the total cost per unit of manufacturing in-house with the cost offered by the
third-party supplier, which is $60 per unit.
Cost of In-house Production per unit = $14.00
Cost of Outsourcing per unit = $60.00
Given that the outsourcing cost is substantially higher than the in-house production cost, it seems
that continuing to manufacture the engine components in-house would be the more financially
viable option. However, before reaching a final conclusion, it's crucial to consider additional
factors.
Other Considerations
1. Quality Control: Maintaining control over the manufacturing process ensures consistent
quality, which is crucial for customer satisfaction and brand reputation. Outsourcing may pose
risks regarding quality control (Brown & White, 2019).
2. Dependence on Third-Party Supplier: Reliance on an external supplier may introduce
vulnerabilities to the supply chain, such as potential delays or disruptions in delivery.
3. Economies of Scale: As production volumes increase, economies of scale may lead to cost
reductions in in-house production over time.
4. Strategic Alignment: Outsourcing may align with the company's strategic goals, such as
focusing on core competencies and reallocating resources to areas of higher value.
Recommendation
Based on the analysis of cost data and consideration of relevant factors, it is recommended that
the company continues to manufacture the engine components in-house. Despite the offer from
the third-party supplier, the in-house production cost is significantly lower, and maintaining
control over production aligns with quality and strategic objectives.
Conclusion
In conclusion, the decision to make or buy engine components requires a comprehensive analysis
of cost factors and other relevant considerations. By carefully evaluating the financial
implications and weighing them against strategic objectives, companies can make informed
decisions that optimize efficiency and value creation.
References
Brown, A., & White, B. (2019). Quality Control in Manufacturing: A Comprehensive Guide.
New York, NY: Wiley.
Smith, C., & Jones, D. (2020). Cost Accounting Principles. Boston, MA: Pearson.
