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Structuring a Make-or-Buy Problem

  • Date Submitted: 07/05/2016 06:00 AM
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Structuring a Make-or-Buy Problem
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Structuring a Make-or-Buy Problem
Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following:
Total Cost Unit Cost
Direct materials $25,000 $5.00
Direct labor 15,000 3.00
Variable manufacturing overhead 7,500 1.50
Variable marketing overhead 8,500 1.70
Fixed plant overhead 30,000 6.00
Total $86,000 17.20
Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number.
2. List the relevant cost(s) of internal production and of external purchase.
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3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
_______make__________ $ _________?________
4. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)
_________buy________ $ _________?________

Structuring a Special-Order Problem
The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of its model F80 at a price of $4.20 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the...


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