A B C D E F G 1 There are multiple parts to this question, each is independent. 2 11-30 Part A: make or buy 3 Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering 4 an offer from a subcontractor to provide 2,000 units of product OP89 for $120,000. 5 6 If Terry does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs: 7 8 Number of units 9 External offer price 2,000 $120,000 External price per unit $60 10 11 Current costs to produce: per unit 12 Direct materials $28 13 Direct labor $18 14 Variable overhead $16 15 Allocated fixed overhead $4 16 17 Req A1: What is the relevant cost per unit to make the product internally? 18 19 20 21 22 Relevant costs 23 24 25 26 27 28 Req A2: If the product is produced internally versus purchase from a supplier, what is the effect in the short-term on net income of producing the part? total 29 Req A3: What strategic considerations likely bear on this make -vs.-buy decision? 30 31 32 33 34 35 36 37 38 11-30 Part B: Disposal of Assets 39 A company has an inventory of 2,000 different parts for a line of cars that has been discontinued. 40 The net book value (NBV) of this inventory is $50,000. The parts can be either re-machined at 41 42 a total additional cost of $25,000 and then sold for $30,000, or the parts can be sold as-is for $2,500. 43 Obsolete merchandise---Net Book value 44 Parts can be re-machined and sold for 45 cost of re-machining 46 Parts can be sold as if 47 $50,000 $30,000 $25,000 $2,500 48 Req B1: How much better (worse) off will the company be if they re-machine the parts? 49 50 Net value of re-machining parts Re-machine Scrap Difference 51 Future revenues 52 Future costs (re-machining) 53 Net benefit from re-machining parts 54 55 Req B2: What strategic considerations likely bear on this further process decision?