Make or Buy Decision

Where the manufacturing of the product requires addditional fixed cost also

Make-or-Buy Decisions ExampleBismark Co. also manufactures bath accessories. Management is considering producing a part it needs (#2) or buying a part produced by Towson Co. for $0.55.

Make-or-Buy Decisions ExampleBismark Co. has the following costs for 150,000 units of Part #2:

Direct materials Direct labor Mixed overhead Variable overhead Fixed overhead Total

$ 28,000 18,500 29,000 15,000 30,000 $120,500

Make-or-Buy Decisions ExampleMixed overhead consists of material handling and setup costs.

Bismark Co. produces the 150,000 units in 100 batches of 1,500 units each.

Total material handling and setup costs equal fixed costs of $9,000 plus variable costs of $200 per batch.

Make-or-Buy Decisions ExampleWhat is the cost per unit for Part #2? $120,500 150,000 units = $0.8033/unit Should Bismark Co. manufacture the part or buy it from Towson Co.?

Make-or-Buy Decisions ExampleBismark Co. anticipates that next year the 150,000 units of Part #2 expected to be sold will be manufactured in 150 batches of 1,000 units each.

Make-or-Buy Decisions ExampleVariable costs per batch are expected to decrease to $100.

Bismark Co. plans to continue to produce 150,000 next year at the same variable manufacturing costs per unit as this year.

Fixed costs are expected to remain the same as this year.

Make-or-Buy Decisions ExampleWhat is the variable manufacturing cost per unit? Direct material Direct labor Variable overhead Total $28,000 18,500 15,000 $61,500

$61,500 150,000 = $0.41 per unit

Make-or-Buy Decisions ExampleExpected relevant cost to make Part #2: Manufacturing Material handling and setups Total relevant cost to make *150 $100 = $15,000 $61,500 15,000* $76,500

Cost to buy: (150,000 $0.55) $82,500 Bismark Co. will save $6,000 by making the part.

Make-or-Buy Decisions ExampleNow assume that the $9,000 in fixed clerical salaries to support material handling and setup will not be incurred if Part #2 is purchased from Towson Co..

Should Bismark Co. buy the part or make the part?

Make-or-Buy Decisions ExampleRelevant cost to make: Variable Fixed Total $76,500 9,000 $85,500

Cost to buy: Bismark would save $3,000 by buying the part.

$82,500

Where the manufacturing of the product requires establishment of a new unit

Tax Incentives as Under Exemption under section 10A: For export :- Full Exemption of income till assessment year 2009-11

Exemption under section 10AA: Exemption under section 10B: Depriciation under section 32: Deduction of Interest on money borrowed for acquisition of such capital assets: Deduction under section 80-IB: