Cost Case Study: Jetta Electronics Ltd.

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Recommended: Vertical Integration vs. Outsourcing

Cost Comparison Buy Make Direct Materials 45000
Direct Labor 60000 Cost of purchase 14x5000 70000
Factory overhead Variable 30000x(1-80%) 6000 30000 Fixed 55000-2000 53000 55000 Total Manufacturing cost 129000 190000
Cost per unit 129000÷5000 25.8 38

So Jetta Electronics Ltd. will save 38-25.8= $12.2 in each unit. Consequently, it is better for Jetta Electronics to buy product DD11 than to make it.

Cost Comparison Buy Make Direct Materials 45000
Direct Labor 60000

Cost of purchase 14x5000 70000
Factory overhead Variable 30000x(1-80%) 6000 30000 Fixed 55000-2000 53000 55000
Margin of producing DD55 7x3000 -21000
Total Manufacturing …show more content…

Should consider non-financial issues regarding its decision to make or to buy the product DD11. When Jetta Electronics Ltd. make its own products (sub-products), it has vertical integration. In such case, it is less dependent of its suppliers. It can ensure smoother flow of parts or materials for production than nonintegrated companies can. On the other hand, Jetta Electronics can gain considerable financial benefits if it choose to buy part DD11.
Jetta Electronics should make its own critical parts to ensure their availability and quality. But it can chose to buy non-critical items that is not profitable to enjoy resulting financial gain and focus on its main core business and activities that provide higher added value and higher profitability. Activity Based Costing (ABC) has started to be used less than 30 years ago. It represents a shift made to ensure that proper valuation of product cost and consequently decision making process will be based on facts relevant to products and their profitability and added value by the company. Currently, slightly less than 20% of the companies are utilizing ABC in the managerial accounting for different purposes. Companies applying ABC includes private sector, public sector and non-profit …show more content…

The analysis is based on several assumptions including constant unit price, constant variable cost per unit, constant total fixed costs, all produced products are sold, and costs change when activity change. The cost-volume-profit (CVP) analysis evaluates the effects of forecast changes in sales, variable costs and fixed costs, to assist in decision making. For CVP analysis to be accurate, data should be accurate. ABC provides accurate data for CVP analysis. CVP will provide accurate information regarding minimum level of production that is required to achieve required level of profitability. Decision taken should be made considering the limitation and constraints such as the capacity of the business. Decision making based on the analysis may include accepting special order to utilize spare capacity, abandoning line of business, existence of a limiting factor, or choosing make option over buy option or vice

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