Engineering manufactures small engines that it sells to manufacturers who install them in products such as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier who wishes to supply the starter assemblies used in these engines. The starter assemblies are currently manufactured in Division 3 of

Dalton Engineering. The costs relating to the starter assemblies for the past 12 months were as follows:

Over the past year, Division 3 manufactured

150,000 starter assemblies. The average cost for each starter assembly is $8 ($1,200,000/150,000).

Further analysis of manufacturing overhead revealed the following information. Of the total manufacturing overhead, only 25% is considered variable. Of the fixed portion,$262,500 is an allocation of general overhead that will remain unchanged for the company as a whole if production of the starter assemblies is discontinued. A further $175,000 of the fixed overhead is avoidable if production of the starter assemblies is discontinued. The balance of the current fixed overhead, $87,500, is the division manager's salary. If Dalton Engineering discontinues production of the starter assemblies, the manager of Division 3 will be transferred to Division 2 at the same salary. This move will allow the company to save the $70,000 salary that would otherwise be paid to attract an outsider to this position.

Requirement 1.

Teterboro Electronics, a reliable supplier, has offered to supply starter-assembly units at $6 per unit. Because this price is less than the current average cost of $8

per unit, the vice-president of manufacturing is eager to accept this offer. On the basis of financial considerations alone, should Dalton Engineering accept the outside offer? Show your calculations.

(Hint:

Production output in the coming year may be different from production output in the past year.) (Round the variable costs per unit to the nearest cent. Leave unused cells blank.)

	All Data		Relevant Data
	Alternative 1: Make	Alternative 2: Buy	Alternative 1: Make	Alternative 2: Buy
Variable direct materials
Variable direct manufacturing labour
Variable manufacturing overhead
Total variable costs
Variable manufacturing costs per unit
Fixed general manufacturing overhead
Fixed overhead, avoidable
Division 2 manager's salary
Division 3 manager's salary
Total fixed costs
Purchase cost per unit, if bought from Teterboro Electronics

Part 2

Calculate the number of units at which the costs of make and buy are equivalent using all of the data. (Round the break-even number of units up to the nearest unit.)

Alternative 1: Make						Alternative 2: Buy
Fixed costs	+	Variable costs		Number of units	=	Fixed costs	+	Purchase costs		Number of units
	+				=		+

Part 3

Calculate the number of units at which the costs of make and buy are equivalent using only the relevant data. (Round the break-even number of units up to the nearest unit.)

Alternative 1: Make						Alternative 2: Buy
Fixed costs	+	Variable costs		Number of units	=	Fixed costs	+	Purchase costs		Number of units
	+				=		+

Part 4

If production is expected to be less than

enter your response here

units, it is preferable to

buy

make

the units needed, while if production is expected to be more than

enter your response here

units, it is preferable to

buy

make

the units needed.

Part 5

Requirement 2. How, if at all, would your response to requirement 1 change if the company could use the vacated plant space for storage and, in so doing, avoid

$80,000

of outside storage charges currently incurred? Why is this information relevant or irrelevant?

Recalculate the number of units given the new information using all of the data. (Round the break-even number of units up to the nearest unit.)

Alternative 1: Make						Alternative 2: Buy
Fixed costs	+	Variable costs		Number of units	=	Fixed costs	+	Purchase costs		Number of units
	+				=		+

Part 6

Recalculate the number of units given the new information using only the relevant data. (Round the break-even number of units up to the nearest unit.)

Alternative 1: Make						Alternative 2: Buy
Fixed costs	+	Variable costs		Number of units	=	Fixed costs	+	Purchase costs		Number of units
	+				=		+

Part 7

With the new storage charge consideration, if production is expected to be less than

enter your response here

units, it is preferable to

buy

make

the units needed, while if production is expected to be more than enter your response here units, it is preferable to

buy

make

the units needed.

Costs Required 1. Teterboro Electronics, a reliable supplier, has offered to supply starter-assembly units at $6 per unit. Because this price is less than the current average cost of $8 per unit, the vice-president of manufacturing is eager to accept this offer. On the basis of financial considerations alone, should Dalton Engineering accept the outside offer? Show your calculations. (Hint: Production output in the coming year may be different from production output in the past year.) 2. How, if at all, would your response to requirement 1 change if the company could use the vacated plant space for storage and, in so doing, avoid $80,000 of outside storage charges currently incurred? Why is this information relevant or irrelevant