Acc 202: Managerial Accounting - Relevant Cost Case Behemoth Motors Corp

Quincy Jones

ACC 202: Managerial Accounting

Module 2 Case Assignment

Relevant Cost Case Behemoth Motors Corp:

BMC has decided to install GPSN (Global Positioning System navigator) in all its SUV, and they are currently manufacturing them. In this case, they have got an offer from Far East Enterprises, Ltd (FEE) a Chinese company which manufactures the GPSN with the same quality as BMC. It is crucial to make an appropriate decision as whether to make or buy the GPSN as this decision will decide about the profitability of the company. In this case, we have to ascertain the cost of manufacturing the GPSN by BMC.

Cost of manufacturing GPSN per unit is $425, and 8,000 units are required per month. Here 2% always fails in the quality parameter; therefore number of units to manufacture in order to meet the 8,000 requirement is as follows:

Actual number of units produced = Required units*(1+2%)

                                                                                     = 8,000 units*(1+2%)

                                                                                     = 8,160 units (rounded off)

Thus, company is required to manufacture 8,164 units in order to meet the demand of 8,000 units at the cost of $425. Total cost of manufacturing the required GPSN by the company is as follows:

Total cost of manufacturing GPSN = Total units manufactures * Cost per unit

                                                                         = 8,160 units * $425

                                                                         = $3,468,000

Thus, the total cost incurred by the company for manufacturing 8,000 units of GPSN is $3,468,000.

The rate offered by the Far East Enterprises, Ltd (FEE) is $400 per unit. In this case company will be required to pay only for 8,000 units as there will be no wastage in the production.  

Total cost of purchase = Number of units purchased * Price per unit

                                                            = 8,000 * $400

                                                            = $3,200,000

Thus, the total cost incurred in purchasing the GPSN directly is $3,200,000 whereas manufacturing those results in $3,469,700. At a glance, it gives an opinion that manufacturing incurs higher cost when compared to purchasing the GPSN.

Cost savings for 8,000 GPSN = Cost of manufacturing – Cost of purchase