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Vertical Integration vs. Outsourcing
Vertical integration pros and cons
Vertical integration pros and cons
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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
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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
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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
In addition, the bargaining power of the sources of inputs is high. The switching costs from one supplier to another are high because there are not many substitutes for the particular input for metal products. Besides, the number of suppliers who produce raw metals is small. The threat of substitute is high. There are many different kinds of substitutes for metal product company. These companies may also produce a large variety of product like Slade Company. Therefore, the substitute is low for this market. Only companies that produce high quality are able to not be substituted by the others.
When one goes to buy a used car they should look for some key things,
To study the BMW case, the background information and role of new plant at Spartanburg will be described at the beginning. Secondly, the 3 alternatives options will be analyzed and compared accordingly to determine a proper conclusion. Finally, the recommendation will be presented with various considerations.
The engineering section of aircraft manufacturing is quite old. It is characterized by a few firms that keep Rolls-Royce on its toes in terms of competition, like General Electric. The small number of firms can be justified by the high cost of starting of...
Detroit asserts that the Cadillac engine system is responsible for cost reduction especially with regard to the Cadillac maintenance (73). This owes to the fact that the flexible logistics of installation and low consumption of fuel guarantee savings. This vehicle’s engine is efficient due to the fact that it is safe to drive at high and low speeds. The brake system of this vehicle does not require electromagnetic fields in order to function. The model in question is also fitted with emergency tools, which help in case of skidding. These tools include the braking cruise control. Cadillac’s brake system is light unlike other vehicles’ brake systems, and this enhances swiftness in driving the Cadillac. Additionally, this model does not have the shortcoming of fuel loss especially through drags. The Cadillac has Eigen solver system, which is responsible for squeal analysis. In this regard, the need for programming is eliminated. The thermoregulation ensures that the braking system’s heat is controlled. Furthermore, the thermoregulation amplifies the computation performance of squeal. The engine...
Since more than 40 years, Toyota Company was thinking how to develop the traditional process costing system and the production system. Some of the companies believe that the increasing of the production is a big profit, while Toyota proved the opposite. The more you increase the products out of the need of the market, the more losses you are going to gain. This kin...
Used auto parts are quite convenient to use since they are always available even for vehicles that are quite
Signode Industries Inc. - Providing Packaging Solutions Executive Summary SIGNODE INDUSTRY: DILEMMA AT HAND: Mr. Gary Reed, President of Signode Industries packaging division, is in a dilemma as what he should be his course of action to meet the 6.8% increase in price of cold rolled steel- the raw material used in manufacture of Signode’s primary product, steel strapping. There are few options given in the case: Increase Signode’s strapping prices to offset the increased price of cold – rolled steel. Maintain Signode’s current book prices as increasing prices would affect sales force morale. Introduce price-flex model as proposed by Jack Davis i.e. a kind of selective discounting or premium charging for customized services. Recommendations Reason: (All data in accordance to 1983) In accordance to Exhibit 1: Sales of Packaging Division of the company = $285,950 In accordance to Table A: Sales of Apex = 33.3% of $285,950 Sales of BBM = 26.8% of $285,950 Sales of HDM = 33.4% of $285,950 Sales of Customized Products = 6.5% of $285,950 In accordance to Exhibit 4: Similarly, For Apex: As it has a capacity utilization of 71% now, Suppose a sale is $100. Then contribution is $39.15 Therefore variable cost is $60.85. Now if we increase the capacity utilization to 100%, Sales becomes $ 141 since production increases by [(100-71)/71] * 100 = 41% Variable Cost = 141% of 60.85 = $85.8 Fixed Cost = 69.38% * 12.3 = $8.53 Total Cost = 85.8+8.53 = $94.33 EBIT = Sales – Variable cost – Fixed Cost = $46.67 % of EBIT = [(46.67/141) * 100] = 33.09% Suppose the company sales 100x units, the total cost was 69.38. Thus per unit cost was .6938. Now the company sells 141x units, the total cost...
The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short essay, written critically to evaluate the application of standard costing and variance analysis to any size of business, and concludes with a verdict that whether or not standard costing and variance analysis is applicable to each business with consideration of its costs and benefits of the system.
In 2000, Kia continues to sell a wide range of vehicles. They target a wide range of needs by offering less expensive economic ...
"Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods" (1) , Now we will discuss why ABC can result in more reliable products costs than conventional labor based product costing system . In recent years, the nature of industrial production has fundamentally altered; we will discuss their characteristics. First we have machine production and capital intensive, Now machines are the main tool and at the heart of production; labors maintain machines and supervise them, and machines are the ones that dictates the pace and rate of production. The second characteristic is high level of overheads relative to direct cost; in modern businesses they tend to use overheads in different ways for example: some products need engineering time and some products require machine time so that products will use overheads differently. The third characteristic is highly competitive international market, transportation including fast freight and relatively cheap; one of the advantages is the use of internet ensures that customers can easily and quickly reach and find products and also cheaply, this environment is highly competitive so companies need to know accurately their range of prices in order to use this information to gain competitive advantage over other
Activity-Based Costing ( ABC ) Summary The business environment in the 1990s is markedly different from that of the past when conventional cost accounting procedures were established. Activity-based costing (ABC), pioneered in the late 1980s, offered a new costing approach consistent with the changed environment. However, ABC did not diffuse rapidly into the business community.
BMW having high market share in European and U.S luxury car markets, started facing issues with launch product qualities and also facing a fierce competition from Japanese producers. Currently the market share was still stable but the rigorous growth of Japanese producers would affect BMW in future. These Japanese competitors had set higher standards of conformance.
Company Overview: Bayerische Motoren Werke AG (BMW) is a German holding company and automobile manufacturer that focuses on the automobile and motorcycle markets worldwide. Franz Josef Popp founded the company in March 1916. BMW is headquartered in Munich, Bavaria, Germany. It also owns and produces Mini cars, and is the parent company of Rolls-Royce Motor Cars. BMW produces motorcycles under BMW Motorrad. It divides its activities into the three main segments: Automobiles, Motorcycles and Financial Services. Its BMW automobile range encompasses the 1 Series, including three-door, five-door, coupe and convertible models; the 3 Series, including sedan, touring, coupe and convertible models; the brand new 4 series, featuring an only coupe design; the 5 Series, available in sedan and touring models; the 6 Series, available as a coupe or convertible; the 7 Series large sedan; the Z4 roadster and coupe; the sports utility vehicles, X3, X5 and X6 and M models, such as M3, M5 and M6. It has producing, assembly, service and sales subsidiaries throughout the world. For the sake of this project, I will be focusing on BMW’s automobile range mentioned above but specifically the 3 series line. The BMW 3 series proves to be the most profitable line due to its relatively low cost and affordability whilst featuring the thrill and power of a German engineered vehicle.
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.