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MBA Week 4 - written assignment BUS5110 Managerial
Accounting
managerial accounting (University of the People)
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UNIVERSITY OF THE PEOPLE (USA)
ID: S281084
PROGRAM: MBA
Managerial Accounting (BUS 5110-01 - AY2022-T4)
DATE: 01 MAY, 2022
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To answer to this case study, I’m considering a make or buy differential analysis, including the
needed cost or revenue data.
Given the annual production of 50.000 units, I’m going to rewrite all the costs annually too.
Description
Direct Materials
Direct Materials/ unit
Direct Labor
Total
Annual Production
Variable factory overhead
Direct labor per unit
Fixed factory overhead
Costs Annually
$75,000/ month
$75.000 x12 = $900.000
$18/ unit
$900.000/50.000 units = $18
$100,000/month
$100.000 x12 = $1.200.000
$175,000/month
$175.000 x12 = $2.100.000
50.000 units
$7.5/unit
$7.5 x 50.000 = $375.000
$24
$1.200.000/50.000 = $24
150% x direct labor/unit 150% x $24 = $36/ unit
Total Annual fixed factory
overhead if the engines are made $36/ unit x 50.000 =
by the company
75% of Total annual fixed
75% x 1.800.000 =
factory overhead, if externalized
= $1.800.000/ year
= $1.350.000 / year
Plan A: If the company buys the engines:
Engine Cost - $60 x 50.000 = $3.000.000 | per unit: $60
75% Total Annual fixed factory overhead/ year : $1.800.000 x 75% = $1.350.000 | per unit: $27
TOTAL costs/year: $4.350.000 / year | per unit: $87
Plan B: If the company makes the engines:
Direct Materials/ year : $900.000 | per unit: $18
Direct Labor/ year: $1.200.000 | per unit: $24
Variable factory Overhead/ year: $375.000 | per unit: $7.5
Total Annual fixed factory overhead/ year : $1.800.000 | per unit: $36
TOTAL costs/ year: $4.275.000 / year | per unit: $85.5
So this means total costs of $4,275,000, providing $75,000 in savings if the engines are made by the
company compared to the $4,350,000 total costs if the engine is externalized. So, I would recommend
that the company makes her own engines, assuming that the staff is capable of designing and building
them flawlessly, as any mistake could increase the cost of the manufacturing and it might as well
overcome the difference, that is not very big anyways, just $75.000/ year and $1.5/ unit.
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