Page 26 - Managerial Accounting-MGT 145

Module 5: Differential Analysis
Make-or-Buy Decision Case

Assume that Friends Company manufactures a product which
requires a particular type of valves. The company currently
purchases the valves from a supplier at a price of P5 per unit.
The company can also produce the valves internally. In the coming

year, the company anticipates a need for 10,000 units of valves. If
the company produces the valve internally, it will incur the
following costs:
Direct labor = P1/unit
Direct material = P2/unit
Variable overhead = P0.5/unit

The manufacturing process for the valves would also require a
purchase of tooling which is typically used within a year. The cost
of such tooling for the 10,000 valves is P20,000.Based on this
information, Friends Company performs the following analysis:

Total Cost for 10,000
Cost Item (MAKE) Per Unit Cost Units

Direct labor 1.00 10,000.00
Direct materials 2.00 20,000.00
Variable overhead 0.50 5,000.00

Annual tooling n/a 20,000.00
Total cost 55,000.00

From the table above, it will cost P55,000 to manufacture 10,000
units. At the same time, it only costs P50,000 (P5 x 10,000 units)
to buy the valves from the supplier. Therefore, Friends Company
should continue buying the valves from the supplier.