sample problem

considerations. Guthrie Generators manufactures a solenoid that it uses in several of its products. Management is considering whether to continue manufacturing the solenoids or to buy then from an outside source. The following information is available. 1. The company needs 18,000 solenoids per year. The solenoids can be purchised from an outside supplier at a cost of $14 per unit. 2. The unit cost of manufacturing the solenoids is $20, computed as follows. 3. If the company decides not to manufacture the solenoids, it will eliminate all of the raw materials and direct labor costs, but will eliminate only 60 percent of the variable factory overhead costs. 4. If the solenoids are purchased from the outside source, machinery used in the production of solenoids will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale of this machinery would also eliminate $4,000 in fixed costs associated with depreciation and taxes. No other reductions in fixed factory overhead will result from discontinuing the production of the solenoids. Instructions a. Prepare a schedule in the format illustrated in Exhibit 21-6 to determine the incremental cost or benefit of buying the solenoids from the outside supplier. Using this schedule, would you recommend that the company manufacture the solenoids or buy them from the outside source? b. Assume that if the solenoids are purchased from the outside source, the manufacturing space previously used to produce them can be used to manufacture an additional 5,000 electric wire harnesses used in the installation of home generators. The wire harnesses have an estimated contribution margin of $3 per unit. Manufacturing additional wire harnesses would have no effect on fixed factory overhead. Would this new assumption change your recommendation as to whether to make or buy the solenoids? In support of your conclusion, prepare a schedule showing the incremental cost or benefit of buying the solenoids from the outside source and using the factory space to produce additional wire harnesses. Problem 21.2A Sample Worked Problem: Problem 21.2B Guthrie Generators Part A \begin{tabular}{|l||l||l||l|} \hline \multicolumn{1}{|c|}{ Part A } & \begin{tabular}{l} Make the \\ Solenoids \end{tabular} & \begin{tabular}{l} Buy the \\ Solenoids \end{tabular} & \begin{tabular}{l} Incremental \\ Analysis \end{tabular} \\ \hline \hline Manufacturing costs for 18,000 solenoids: & & & \\ \hline Direct materials & & & \\ \hline Direct labor & & \\ \hline Factory overhead (make vs. buy): & & \\ \hline Variable & & \\ \hline Fixed & & \\ \hline Cost to purchase 18,000 solenoids & & \\ \hline \end{tabular} 14 Schedule requested in Part B Effect of alternative use of factory space: Contribution margin of alternative use of factory space Less: Incremental benefit of producing solenoids internally (from Part Incremental benefit of buying solenoids from an outside source and Explain: Read over the assumptions stated in Part B of the instructions in your text, Would Fax Run Outhters manuActures lightueight frames that it uses in several of its backpack products. Management is considering whether to continus manuficturing the frame or to bery them from an outside source. The following information is avaliable. 1. The compary needs 14,000 frames per year. The frames can be purchased from an outside supplier at a cost of $20 per unit. 2. The unit codt of manufacturing the framo b $29, computed as follows. Based upon the above analysis, management will save $31,200 if it continues to 3. Ir the compary decides ack to manufcture the frames, it will eliminate all of the raw materials and direct labor costs, but will eliminate onty 40 pereent of the variable factory overhead costs. 4. Ir the frames are porchased trom the outside source, machinery used in the production of frames will be sold at its book value. depredirtion and turss. No ocher reductions in fued Actory overhead will result fiom discontinuing the production of the frames. Instructions the outside supplier. Uking this schedule, would jou recommend that the compary manufacture the frames or buy them from the outside source? b. Asaime that if the frames are purchased from the outside source, the manufacturing space previousty used to produce them can be used to manufeture an additional 17,000 alters used in its portable water puriners. The alters have an extimated contuibution marsin of $2 per unit. Manufacturias additional thers would have po effect on fxed factory overticad. Would this new assumption change jour recommendation es to wecher to make or buy the beckpack frames? In support of jour conciusion, prepare a schedule showing the incremental cos or benefir of buying the frames from the outside source and using the factory space to produce additional water purifertion then. Based upon the above analysis, the company will save $2,800 if it buys frames exterually