Nono N.

asked • 06/04/22

make or buy decision in accounting

Oxford Engineering manufactures small engines. The engines are sold to manufacturers who install them in such products as lawn mowers. The company currently manufactures all the parts used in these engines, but it is considering a proposal from Tidnish Electronics, a reliable supplier, to supply starter assembly units for $6.10 each.

The starter assembly is currently manufactured in Division 3 of Oxford Engineering. Last year, Division 3 manufactured 164,000 starter assemblies, but over the next several years, it is expected that 191,000 assemblies will be needed each year. Total costs related to the starter assembly for last year were as follows:

  Direct material$331,280  Direct labor$183,680  

Total overhead$820,000  Total$1,334,960

Further analysis of overhead revealed the following information:

  1. $451,000 of total overhead was fixed.
  2. $341,000 of the fixed overhead can be avoided if the starter assembly is purchased from the supplier.

Also, if the company buys the assembly from Tidnish, sales of another product can be increased, resulting in additional contribution margin of $35,000 with no additional fixed costs.

By how much will Oxford Engineering's total profits change if they decide to buy the starter assembly from Tidnish Electronics instead of making it themselves?   [Note: if the buy costs are less than the make costs, enter the difference as a positive number; if the buy costs are more than the make costs, enter the difference as a negative number.]

1 Expert Answer


Richard W. answered • 03/02/23

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