Lakeview Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply several component parts used in the engine assemblies, which are currently being produced by Lakeview. The supplier will charge Lakeview $325 per engine for the set of parts. Lakeview’s current costs for those part sets are direct materials, $145; direct labor, $85; and manufacturing overhead applied at 100% of direct labor. Variable manufacturing overhead is considered to be 20% of the total, and fixed overhead will not change if the part sets are acquired from the outside supplier. What would be the net cost advantage or disadvantage if Lakeview decided to purchase the parts?

Lakeview Engine, Inc.

The net cost disadvantage if Lakeview decided to purchase the parts from the supplier per part is:

= $78

Explanation:

a) Data and Calculations:

Price by outside supplier per engine = $325

Current costs of manufacturing the engine:

Direct materials per unit = $145

Direct labor per unit = $85

Variable manufacturing overhead (20%) = $17

Fixed manufacturing overhead (80%) = $68

Total variable manufacturing cost per unit = $247

Incremental Analysis:

                                                             Make           Buy      Incremental

Production costs:

Variable manufacturing costs per unit:

Direct materials per unit                      $145

Direct labor per unit                              $85

Variable manufacturing per unit           $17

Total variable manufacturing costs   $247         $325        $78

b) Therefore, it costs more to Lakeview to buy the part from the outside supplier than it does when it makes it internally.  Lakeview should continue making the parts.

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