BUS 5110 Managerial Accounting

Managerial Accounting

Written Assignment Unit 4

University of the People

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BUS 5110 Managerial Accounting

In this case study, I am going to apply the Differential Analysis regarding Make or Buy decision.

Differential analysis focuses on the difference in future cost and benefits of at least two alternatives

for managers to make intelligent decisions (Garrison, Noreen, & Brewer, 2018).

A make or buy decision is when the manager has to decide whether to make the product internally

or buy the product from an outside supplier (Heisinger & Hoyle, 2012).

The recommendation in the case study will be based purely on the quantitative data provided, and

will not take into account the qualitative data, which is not provided and which in real life situations

may have a significant impact.

In preparing the analysis, I will compile the relevant costs for two alternatives: making the

component in-house or buy from a supplier. Then I will determine the differential product cost and

prepare a summary to reach a recommendation. This is the method recommended by Heisinger &

Hoyle (2012).

Table 1: Summary of production costs

Per Unit Total for Differential costs

8,000 units

Direct materials $5 $40,000 This variable cost will be eliminated

if the company buys from a supplier

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Direct labor $4 $32,000 This variable cost will be eliminated

if the company buys from a supplier

Variable factory $4 $32,000 This variable cost will be eliminated

overhead applied if the company buys from a supplier

Fixed factory over $6 $48,000 Two thirds of this fixed cost will
head applied (150% of remain even if the company buys
direct labor cost) from a supplier

Total Cost $19 $152,000

Table 2: Make or Buy Differential Analysis

Alternative 1 Alternative 2 Differential Alternative

(Make) (Buy) Amount 1 Is

Variable costs

Cost to buy from outside $0 $128,000 (1) ($128,000) Lower

Direct materials $40,000 $0 $40,000 Higher

Direct labor $32,000 $0 $32,000 Higher

Variable factory overhead applied $32,000 $0 $32,000 Higher

Fixed factory overhead applied

(150% of direct labor cost) $48,000 $32,000 (2) $16,000 Higher

Total Cost $152,000 $160,000 ($8,000) Lower

(1) Cost to buy from outside = $16 * 8,000 units = $128,000.

(2) Fixed cost in Alternative 2 = 2/3 * Fixed cost in Alternative 1 = 2/3 * $48,000 = $32,000.

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Table 3: Summary of Differential Analysis

Results of outsourcing the component

Cost increase to buy from outside ($128,000)

Direct materials cost savings $40,000

Direct labor cost savings $32,000

Variable factory overhead savings $32,000

Fixed factory overhead savings $16,000

Cost increase from outsourcing ($8,000)

Based on this analysis, the recommendation to the management is to continue production of the

component in-house because the outsourcing option will reduce the profit by $8,000.

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Reference list:

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial accounting. New York, NY:

McGraw-Hill Education.

Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa 3.0.

Can be read online at: https://2012books.lardbucket.org/books/accounting-for-managers/

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