MA74 Problem: Relevant Costing – Make or Buy - Surtel Company

MA74 Problem: Relevant Costing – Make or Buy - Surtel Company

When you completed your audit of the Surtel Company, management asked for your assistance indeciding whether to continue manufacturing a part or to buy it from an outside supplier. The part, whichis named Faktron, is a component used in some of the finished products of the company. From your auditworking papers and from further investigation, you develop the following data as being typical of thecompany's operations:

• The annual requirement for Faktrons is 5,000 units. The lowest quotation from a supplier was $8

 per unit.

• Faktrons have been manufactured in the

Precision Machinery Department. If Faktrons are purchased from an outside supplier, certain machinery will be sold and would realize its net book value.

• Following are the total costs of the Precision

Machinery Department during the year under audit

when 5,000 Faktrons were made:Direct materials $67,500Direct labour 50,000

Indirect labour 20,000

Light and heat 5,500

Power 3,000Depreciation 10,000

Property taxes and insurance 8,000Payroll taxes and other benefits 9,800Other 5,000• The following Precision Machinery Department

costs apply to the manufacture of Faktrons:

direct materials, $17,500; direct labour, $28,000; indirect labor, $6,000; power, $300; other $500.The sale of the equipment used for Faktrons

would reduce the following costs by the amounts

indicated: depreciation, $2,000; property taxes and insurance, $1,000.• The following additional Precision Machinery Depa

rtment costs would be incurred if Faktronswere purchased from an outside supplier: freight

, $0.50 per unit; indir 

ect labor for receiving,

materials handling, inspection, $5,000. The cost

of the purchased Faktrons would be considered aPrecision Machinery Department cost.

 Required -

a. Prepare a schedule comparing the total costs of the Precision Machinery Department (1) whenFaktrons are made and (2) when Faktrons are bought from an outsider supplier. b. Discuss the considerations in addition to the cost factors that you would bring to the attention of managers in assisting them in deciding whether to make or buy Faktrons. Include in your discussion the considerations that might be applied to the evaluation of the outside supplier.