Make-or-Buy Decision (CPA) When you had completed your audit of The Scoopa Company, management asked for your assistance in arriving at a decision whether to continue manufacturing a part or to buy it from an outside supplier. The part, which is named Faktron, is a component used in some of the finished products of the Company.

From your audit working papers and from further investigation you develop the following data as being typical of the Company’s operations:

1. The annual requirement for Faktrons is 5,000 units. The lowest quotation from a supplier was $8.00 per unit.

2. Faktrons have been manufactured in the Precision Machinery Department.

If Faktrons are purchased from an outside supplier, certain machinery will be sold and would realize its book value.

3. Following are the total costs of the Precision Machinery Department during the year under audit when 5,000 Faktrons were made:

Materials $67,500 Direct labor 50,000 Indirect labor 20,000 Light and heat 5,500 Power 3,000 Depreciation 10,000 Property taxes and insurance 8,000 Payroll taxes and other benefits 9,800 Other 5,000 4. The following Precision Machinery Department costs apply to the manufacture of Faktrons: material, $17,500; direct labor, $28,000; indirect labor, $6,000; power, $300; other, $500. The sale of the equipment used for Faktrons would reduce the following costs by the amounts indicated:
depreciation, $2,000; property taxes and insurance, $1,000.
5. The following additional Precision Machinery Department costs would be incurred if Faktrons were purchased from an outside supplier: freight, $.50 per unit; indirect labor for receiving, materials handling, inspection, etc., $5,000. The cost of the purchased Faktrons would be considered a Precision Machinery Department cost.

Prepare a schedule showing a comparison of the total costs of the Precision Machinery Department (1) when Faktrons are made, and (2) when Faktrons are bought from an outside supplier.
. Discuss the considerations in addition to the cost factors that you would bring to the attention of management in assisting them to arrive at a decision whether to make or buy Faktrons. Include in your discussion the considerations that might be applied to the evaluation of the outside supplier. lop5