Suppose a BMW executive in Germany is trying to decide whetherthe company should continue to manufacture an engine component or purchase itfrom Frankfurt Corporation for $50 each in the next year Demand for the comingyear is expected to be the same as for the current year, 200,000 units. Data for thecurrent year is as follows: If BMW makes the components, the unit costs of direct material will increase by10%. If BMW buys the components, 30% of the fixed costs will be avoided. Theother 70% will continue regardless of whether the components are manufactured orpurchased. Assume that variable overhead varies with output volume. Assume also that the BMW capacity in question can be rented to a localelectronics firm for $1,150,000 for the coming year, Prepare a schedule thatcompares the net relevant costs of the three alternatives: make, buy and leavecapacity idle, buy and rent. Which is the most favorable alternative? B
Suppose a BMW executive in Germany is trying to decide whetherthe company should continue to manufacture an engine component or purchase itfrom Frankfurt Corporation for $50 each in the next year Demand for the comingyear is expected to be the same as for the current year, 200,000 units. Data for thecurrent year is as follows:
If BMW makes the components, the unit costs of direct material will increase by10%. If BMW buys the components, 30% of the fixed costs will be avoided. Theother 70% will continue regardless of whether the components are manufactured orpurchased. Assume that variable overhead varies with output volume.
Assume also that the BMW capacity in question can be rented to a localelectronics firm for $1,150,000 for the coming year, Prepare a schedule thatcompares the net relevant costs of the three alternatives: make, buy and leavecapacity idle, buy and rent. Which is the most favorable alternative? By how muchin total?
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