Guthrie Generators manufactures a solenoid that it uses in several of its products. Management is considering whether to continue manufacturing the solenoids or to buy them from an outside source. The following information is available.
1. The company needs 18,000 solenoids per year. The solenoids can be purchased from an outside supplier at a cost of $14 per unit.

2. The unit cost of manufacturing the solenoids is $20, computed as follows.

3. If the company decides not to manufacture the solenoids, it will eliminate all of the raw materials and direct labor costs, but will eliminate only 60 percent of the variable factory overhead costs.

4. If the solenoids are purchased from the outside source, machinery used in the production of solenoids will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale of this machinery would also eliminate $4,000 in fixed costs associated with depreciation and taxes. No other reductions in fixed factory overhead will result from discontinuing the production of the solenoids.

Instructions.
a. Prepare a schedule in the format illustrated in Exhibit 21–6 to determine the incremental cost or benefit of buying the solenoids from the outside supplier. Using this schedule, would you recommend that the company manufacture the solenoids or buy them from the outside source?
b. Assume that if the solenoids are purchased from the outside source, the manufacturing space previously used to produce them can be used to manufacture an additional 5,000 electric wire harnesses used in the installation of home generators. The wire harnesses have an estimated contribution margin of $3 per unit. Manufacturing additional wire harnesses would have no effect on fixed factory overhead. Would this new assumption change your recommendation as to whether to make or buy the solenoids? In support of your conclusion, prepare a schedule showing the incremental cost or benefit of buying the solenoids from the outside source and using the factory space to produce additional wire harnesses.

Transcribed Image Text:

Direct materials.. Direct labor... Factory overhead: Variable Fixed .... Total manufacturing costs Cost per unit ($360,000 18,000 units) $162,000 36,000 72,000 90,000 $360,000 $ 20