Tri-Products Is Trying to Decide Whether to Make-Or-Buy an Accessory

question 120

Essay

Tri-products is trying to decide whether to make-or-buy an accessory item for one of their products. It is projected that this item will sell for $10 each. If the item is outsourced, there is virtually no cost other than the $6 per unit that they would pay their supplier. Internally, they have two choices. Process A requires an investment of $120,000 for design and equipment, but results in a $4 per unit cost. Process B requires only a $100,000 investment, but its per unit cost is $5. Regardless of whether the item is subcontracted or produced internally, there is a 50% chance that they will sell 50,000 units, and a 50% chance that they will sell 100,000 units. Draw the decision tree appropriate to the alternatives and outcomes stated. Using decision trees and EMV, what is their best choice?

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Definitions:

Unit Product Cost

The total cost to produce one unit of product, including direct materials, direct labor, and allocated overhead costs.

Current Year

The ongoing year or the present year being referenced.

Absorption Costing

Absorption costing is a costing method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.

Manufacturing Costs

Expenditures that are directly tied to the production of goods, including raw materials, labor, and overhead expenses.