Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 5

The make or buy decision Eldon Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply several component parts used in the engine assemblies, which are currently being produced by Eldon. The supplier will charge Eldon $620 per engine for the set of parts. Eldon’s current costs for those part sets are direct materials, $360; direct labor, $180; and manufacturing overhead applied at 100% of direct labor. Variable manufacturing overhead is considered to be 30% of the total, and fixed overhead will not change if the part sets are acquired from the outside supplier.

Required:

Should Eldon Engine, Inc., continue to make the part sets or accept the offer to purchase them for $620?

Step 1 of 2

The decision can be taken on the basis, the variants of situation shows the advantage to make on costs:

Table 1: Compute costs into three different situations:

Particulars	Current Production Costs	Avoidable Cost if Purchased	Cost to Buy
Manufacturing costs:
Direct material	$360	$ 360
Direct labor	180	180
Variable overhead	54	54
Fixed overhead	126	0
Total cost per unit	$720	$594
Purchase costs:
Engine assembly part sets			$620
Advantage to make		$26