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McMullen Corporation manufactures automatic door openers. The company employs 15,000 electronic hinges per year as a component in the assembly of the openers. You have been engaged by the McMullen to help with an evaluation of whether the company must continue producing the hinges or purchase them from an outside vendor. The accounting Department give the following detail about the annual cost to produce electronic hinges.

Direct material: 54,000

Direct labor: 60,000

Variable manufacturing overhead: 36,000

Fixed manufacturing overhead: 90,000

Total cost: 240,000

The procurement department gives the following supplier pricing:

Supplier A price per hinge: 11.00

Supplier B price per hinge: 10.75

Supplier C price per hinge: 10.50

The supplier pricing was obtained in response to the formal request for proposal (RFP). Procurement has determined such suppliers meet up McMullens technical specifications and quality requirements. If McMullen stops producing the part internally, 10% of the manufacturing overhead would be removed.

Make a make or buy analysis showing the annual merit or demerit of accepting an outside supplier's offer.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M917640

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