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Homework answers / question archive / Bale Inc
Bale Inc. makes a range of products. The company's predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead S140,000 Fixed manufacturing overhead 5560,000 Direct labor-hours 35,000 Component B26 is used in one of the company's products. The unit product cost of the component according to the company's cost accounting system is determined as follows: Direct materials S 45.00 Direct labor 32.00 Manufacturing overhead applied 40.00 Unit product cost S117.00 An outside supplier has offered to supply component B26 for $101 cach. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Bale chronically has idle capacity Required (10 Marks) 1. Is the offer from the outside supplier financially attractive? Why? Show calculations! 2. What are the probable reasons for a company to buy inputs from outsiders even though "making is cheaper to them? 3. What are the probable reasons for a company to make their inputs even though "buying from outside supplier" is cheaper to them?
Ans :
1) D Mat , D labor and variable mFg Ohd are all variable in nature hence relevant for our decision.
2) Fixed mfg Ohd Is not relevant since they will not change by our decision to produce or purchase from outside.
3) Variable portion of Pre determined mfg Ohd = $ 140000 /35000 hrs = $2 /hr
4) Total Mfg Ohd = FC + Variable cost = 560000 +140000 = $700000
5) Pre determined mfg Ohd per hour = 700000 / 35000 hrs = $20/hr
6) Hrs required to produce B26 = $40(This is given in question as a cost of B26) / $20 = 2 hours
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Ans :1 Variable Cost saved to make B26 = mat +lab +var mfg ohd |
45+32+($2*2hrs) =$81 |
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Purchase from outside cost would be |
$101 |
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Net Dis-advantage =101-81 |
20 |
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Hence the offer is not acceptable |
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Ans 2: Generally a company who is having multi country operations will avoid making all parts by themselves, rather they would prefer to buy it from some local but good quality manufacturer. This would may not save cost in monetary terms but would save the risk to the company with regard to physical facilities, equipment, and employees.
It also frees up company capacity and helps in achieving global specialisation.
The capital blocked in the production is also freed up and used for some other purpose.
Ans 3: Reasons for making rather than buying from outside :
i) The quality might get effected if we purchase and we have a Goodwill of quality maintenance .
ii) Sometimes buying from outside have some hidden cost like breakage , theft etc.
iii) It may diminish innovation. Companies like LG, Apple , Samsung all are highly based on In house research.
