Make or Buy Analysis

Introduction:
Lawrence Company manufacture simple tablets for the marketplace. Here is a list of their products parts:

Camera Module Processor NAND & DRAM PCB WI FI & GPS Baseband

Display and glass Touch Sensor Battery Pack Sensors and Connectors Enclosure

Lawrence Company is faced with the decision to either make or buy the camera module for their tablets. They have asks you as their accountant to look at the numbers to give them factual financial advice on which would be the best course of action on this matter. They have cost for manufacturing for the cameras as $8.00 per unit or they believe they can purchase them in the marketplace for $7.00 per unit.

Here is the web-link to the presentation for this Analysis: http://prezi.com/siw3g1ad1kwd/make-or-buy-analysis/

MJC

Make or Buy Analysis

Practice Problem:
Here is Lawrence Companys manufacturing data for the cameras:

Manufacturing Data Direct Materials 60,000 Direct Labor 70,000 Variable manufacturing overhead 50,000 Fixed manufacturing costs 70,000 Total manufacturing costs 250,000 Total cost per unit (250,000 31,250) 8.00

After reviewing the manufacturing cost Lawrence Company determines that only 15,000 of the fixed cost would be eliminated by purchasing the cameras. They have found a retailer that would sell them the same quality of camera for $7.00 per unit.

Instructions:
Create a make or buy analysis for Lawrence Company. Explain why or why not they should make or buy the Cameras. What if they could use the freed up space now use to product the cameras generate $30,000 more in income?

MJC

Make or Buy Analysis

Answer:
Buy without an Opportunity Cost Make Direct Materials Direct Labor Variable manufacturing cost Fixed manufacturing cost Purchases price Total cost 60,000 70,000 50,000 70,000 0 250,000 Buy with an Opportunity Cost Make Direct Materials Direct Labor Variable manufacturing cost Fixed manufacturing cost Purchases price Total cost Opportunity cost Total cost 60,000 70,000 50,000 70,000 0 250,000 30,000 280,000 Buy 0 0 0 55,000 218,750 273,750 273,750 Net Income Increase or Decrease 60,000 70,000 50,000 15,000 (218,750) (23,750) 6,250 Buy 0 0 0 55,000 218,750 273,750 Net Income Increase or Decrease 60,000 70,000 50,000 15,000 (218,750) (23,750)

Calculations:
Without any opportunity cost:

Make cost will be the same as those given by the company. Buy will be: Fixed manufacturing cost: $70,000 15,000 = 55,000 Purchases price for the cameras: 31,250 cameras X the $7.00 per unit = $218,750 total purchase price. Decrease in Net income: Buy price of $273,750 Make price of $250,000 = (23,750) loss of income.

MJC

Make or Buy Analysis

With an opportunity cost: Generate more income: The Opportunity cost is added to the manufacturing cost: $250,000 + 30,000 = 280,000 new manufacturing cost with opportunity cost factored in to the process. Result: $280,000 273,750 = 6,250 increase in profit

Results:
The results of this analysis is that without an opportunity cost Lawrence Company should continue to manufacture the cameras because they would loss $23, 750 in net income if they purchased them. However, if they would manage to produce $30,000 more in income for the freed up space then they should buy the cameras because it would result in an increase of net income by $6,250.

MJC