Richard W. answered • 03/02/23

Guru Tutor with vast Knowledge in Business and Related Field

To determine whether Oxford Engineering should continue manufacturing the starter assembly or buy it from Tidnish Electronics, we need to compare the total costs of each option.

The total cost of manufacturing the starter assembly is:

Direct material + Direct labor + Total overhead = $331,280 + $183,680 + $820,000 = $1,334,960

If Oxford Engineering buys the starter assembly from Tidnish Electronics, the cost will be $6.10 per unit, and 191,000 units will be needed each year. Therefore, the total cost of buying the starter assembly will be:

Cost per unit x Number of units needed per year = $6.10 x 191,000 = $1,166,100

The difference in total costs between making and buying the starter assembly is:

Total cost of making - Total cost of buying = $1,334,960 - $1,166,100 = $168,860

However, we also need to consider the $341,000 of fixed overhead that can be avoided if Oxford Engineering buys the starter assembly from Tidnish Electronics. In addition, the company can increase sales of another product, resulting in additional contribution margin of $35,000 with no additional fixed costs.

Therefore, the net difference in total profits if Oxford Engineering decides to buy the starter assembly from Tidnish Electronics instead of making it themselves is:

Savings in fixed overhead + Additional contribution margin - Difference in total costs = $341,000 + $35,000 - $168,860 = $207,140

Therefore, Oxford Engineering's total profits will increase by $207,140 if they decide to buy the starter assembly from Tidnish Electronics instead of making it themselves.