The company is planning to introduce a new engine. The engine requires a special part that...

 

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The company is planning to introduce a new engine. The engine requires a special part that the company can either make or buy from an outside supplier. The lowest outside price for the part is $93,000 per unit. If the part is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $104,000. The company will also need to rent a new production facility at $164,000 a year. Fixed overhead is allocated to all production using a predetermined overhead rate of 75% of direct labor. However, the allocated fixed overhead costs would not be avoided if the part were not produced. The company plans to produce 20 engines with this part per year. A preliminary analysis of the annual costs to produce 20 parts would be as follows: Direct materials Direct labor Variable overhead Equipment depreciation Building rental Allocated fixed overhead 560,000 760,000 200,000 104,000 164,000 570,000 Required: 1. Calculate the incremental cost to produce 20 units of this part. There are no opportunity costs. 2. Calculate the total cost to buy 20 units of the part. 3. Compare the incremental cost to produce the part vs. the cost to buy it. 4. Decide whether it is better for the company to make or buy this part? Please explain your answer. 5. Show your answers, calculations and explanations The company is planning to introduce a new engine. The engine requires a special part that the company can either make or buy from an outside supplier. The lowest outside price for the part is $93,000 per unit. If the part is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $104,000. The company will also need to rent a new production facility at $164,000 a year. Fixed overhead is allocated to all production using a predetermined overhead rate of 75% of direct labor. However, the allocated fixed overhead costs would not be avoided if the part were not produced. The company plans to produce 20 engines with this part per year. A preliminary analysis of the annual costs to produce 20 parts would be as follows: Direct materials Direct labor Variable overhead Equipment depreciation Building rental Allocated fixed overhead 560,000 760,000 200,000 104,000 164,000 570,000 Required: 1. Calculate the incremental cost to produce 20 units of this part. There are no opportunity costs. 2. Calculate the total cost to buy 20 units of the part. 3. Compare the incremental cost to produce the part vs. the cost to buy it. 4. Decide whether it is better for the company to make or buy this part? Please explain your answer. 5. Show your answers, calculations and explanations

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1 Calculate the Incremental Cost to Produce 20 Units Incremental Cost to Produce Direct Materials Di... View the full answer