Written Assignment Unit 4

“Differential Analysis”
University of the People
BUS 5110 Managerial Accounting
Dr. Peggy January (instructor)
December 7, 2021
BUS 5110: Managerial Accounting- Written Assignment Unit 3
To begin approaching the problem, we first begin by categorizing the income, variable
costs, and fixed costs and calculating our annual costs. The income is straightforward $175
per flight. Variable costs per flight are $100 in fuel per flight and a $30 boat crew fee. The
fixed costs are monthly and include a $350 loan payment, $2500 scheduler salary and $500
dock fee for a total of $3350. This monthly fee results in a fixed annual cost of $40,200.
Once we’ve categorized the line items we can calculate the contribution margin by
subtracting the variable costs from the revenue (Walther & Skousen, 2009, p. 50). The flight
price of $175 minus the variable costs of $30 boat crew fee and $100 in fuel per flight result
in a contribution margin of $45 per flight. This contribution margin is just under 26% of the
revenue.
Now that we understand our contribution margins and monthly costs, we can calculate
the number of flights in a year that we will need to break even. This calculation is made by
dividing the annual fixed costs by the contribution margin, or $42,000 divided by $45. Since
we can’t do partial unit sales in this business, we also need to round up to the next whole
number to calculate the break-even cost without risking debt. The number of flights required
to break even is 894 flights. Monthly (with rounding) this means we would need to book 175
flights, or on average 2.45 flights per day. This number of flights results in a required annual
flight sales figure of $ 156,450.
If we add a 2% referral cost per flight, that equates to $3.50 per flight for a referral.
While it’s not realistic to assume that every flight is a referral, it is the worst-case forecasting
scenario. If we assume the worst-case cost scenario, the contribution margin per flight
becomes $41.50. This changes the number of annual flights to 969 for our break-even price.
This number of flights results in a required annual flight sales figure of $169,575
BUS 5110: Managerial Accounting- Written Assignment Unit 3
To begin approaching the problem, we first begin by categorizing the income, variable
costs, and fixed costs and calculating our annual costs. The income is straightforward $175
per flight. Variable costs per flight are $100 in fuel per flight and a $30 boat crew fee. The
fixed costs are monthly and include a $350 loan payment, $2500 scheduler salary and $500
dock fee for a total of $3350. This monthly fee results in a fixed annual cost of $40,200.
Once we’ve categorized the line items we can calculate the contribution margin by
subtracting the variable costs from the revenue (Walther & Skousen, 2009, p. 50). The flight
price of $175 minus the variable costs of $30 boat crew fee and $100 in fuel per flight result
in a contribution margin of $45 per flight. This contribution margin is just under 26% of the
revenue.
Now that we understand our contribution margins and monthly costs, we can calculate
the number of flights in a year that we will need to break even. This calculation is made by
dividing the annual fixed costs by the contribution margin, or $42,000 divided by $45. Since
we can’t do partial unit sales in this business, we also need to round up to the next whole
number to calculate the break-even cost without risking debt. The number of flights required
to break even is 894 flights. Monthly (with rounding) this means we would need to book 175
flights, or on average 2.45 flights per day. This number of flights results in a required annual
flight sales figure of $ 156,450.
If we add a 2% referral cost per flight, that equates to $3.50 per flight for a referral.
While it’s not realistic to assume that every flight is a referral, it is the worst-case forecasting
scenario. If we assume the worst-case cost scenario, the contribution margin per flight
becomes $41.50. This changes the number of annual flights to 969 for our break-even price.
This number of flights results in a required annual flight sales figure of $169,575
BUS 5110: Managerial Accounting- Written Assignment Unit 3
To begin approaching the problem, we first begin by categorizing the income, variable
costs, and fixed costs and calculating our annual costs. The income is straightforward $175
per flight. Variable costs per flight are $100 in fuel per flight and a $30 boat crew fee. The
fixed costs are monthly and include a $350 loan payment, $2500 scheduler salary and $500
dock fee for a total of $3350. This monthly fee results in a fixed annual cost of $40,200.
Once we’ve categorized the line items we can calculate the contribution margin by
subtracting the variable costs from the revenue (Walther & Skousen, 2009, p. 50). The flight
price of $175 minus the variable costs of $30 boat crew fee and $100 in fuel per flight result
in a contribution margin of $45 per flight. This contribution margin is just under 26% of the
revenue.
Now that we understand our contribution margins and monthly costs, we can calculate
the number of flights in a year that we will need to break even. This calculation is made by
dividing the annual fixed costs by the contribution margin, or $42,000 divided by $45. Since
we can’t do partial unit sales in this business, we also need to round up to the next whole
number to calculate the break-even cost without risking debt. The number of flights required
to break even is 894 flights. Monthly (with rounding) this means we would need to book 175
flights, or on average 2.45 flights per day. This number of flights results in a required annual
flight sales figure of $ 156,450.
If we add a 2% referral cost per flight, that equates to $3.50 per flight for a referral.
While it’s not realistic to assume that every flight is a referral, it is the worst-case forecasting
scenario. If we assume the worst-case cost scenario, the contribution margin per flight
becomes $41.50. This changes the number of annual flights to 969 for our break-even price.
This number of flights results in a required annual flight sales figure of $169,575
The decision to make or buy components should be made on the basis of differential analysis
(Weygandt et al., 2012)
In our case study, a vacuum manufacturer has prepared the following cost data for manufacturing
one of its engine components based on the annual production of 50,000 units.

Description cost per month

Direct material $75,000.00
Direct Labor $100,000.00
Total $175,000.00
In addition, variable factory overhead is applied at $7.50 per unit. Fixed factory overhead is
applied at 150% of direct labor cost per unit. The vacuums sell for $150 each. A third party has
offered to make the engines for $60 per unit. 75% of fixed factory overhead, which represents
executive salaries, rent, depreciation, and taxes, continue regardless of the decision. Should the
company make or buy the engines?
The annual cost will be as follow:
Description cost per month Cost per Year
Direct material $75,000.00 $900,000.00
Direct Labor $100,000.00 $1,200,000.00
Total $175,000.00 $2,100,000.00

ariable Factory Overhead =

$7.50 per unit, in same vein,
total variable factory
overhead = $7.50 * 50,000 =
$375,000 for the year.
Fixed factory overhead = 150%
of direct labor cost per unit.
Therefore, we have to solve for
direct labor cost per unit.
Total direct labor cost for the
year = $1,200,000
This means that $1,200,000 =
50,000 units
variable Factory Overhead = $7.50 per unit,
Total variable factory overhead = $7.50 * 50,000 = $375,000 for the year
Fixed factory overhead = 150% of direct labor cost per unit. Therefore, we have to solve for
direct labor cost per unit.
Total direct labor cost for the year = $1,200,000This means that $1,200,000 = 50,000 units
1,200,0000.00
Direct labor cost per unit = =$ 24
50,000

Fixed factory overhead (rent,

lease, salary) per unit = 150%
of $24 = $36
Total Annual fixed factory
overhead = $36 * 50,000 =
$1,800,000
Fixed factory overhead (rent, lease, salary) per unit = 150% of $24 = $36
Total Annual fixed factory overhead = $36 * 50,000 = $1,800,000
Costs to buy engines from outside = $60 * 50,000 = $3,000,000
75% fixed costs of annual fixed factory overhead = 75% * 1,800,000 = $1,350,000

The annual production costs for the vacuum manufacture will be

 cost per Unit Total
Variable production cost $18.00 $900,000.00
Direct Materials $24.00 $1,200,000.00
Manufacturing overhead 7,5 $375,000.00
Fixed production costs
Factory overhrad $36.00 $1,800,000.00
Total production costs $4,275,000.00
 Articulate the approach to solving the problem, including which financial information is
relevant and not relevant
The sales revenue annual = $150 per unit * 50,000 units = $7,500,000. We do not need this
because the focus of make-or-buy decisions is on product costs, and because sales revenue is not
differential to this decision, it is not necessary to include sales revenue in the analysis
Result of Outsourcing Manufacturing of Engine Component

Cost to buy engine from outside $3,000,000.00

Direct Materials $900,000.00
Direct Labor $1,200,000.00
Manufacturing Overhead $375,000.00
Fixed product costs
Factory overhead ( rent, lease, salary) $450,000.00
Make-or-Buy Differential Analysis for vacuum manufacturer is as follow:

Aletrnative 1 Alternative 2
Differetial amout Alternative 1 is
make internally Buy from outide
Variable production cost
Cost to buy engine from outside $0.00 $3,000,000.00 $3,000,000.00 Lower
Direct Materials $900,000.00 $0.00 $900,000.00 Higher
Direct Labor $1,200,000.00 $0.00 $1,200,000.00 Higher
Manufacturing Overhead $375,000.00 $0.00 $375,000.00 Higher
Fixed product costs
Factory overhead ( rent, lease, salary)
$1,800,000.00 $1,350,000.00 $450,000.00 Higher
Total production costs $4,275,000.00 $4,350,000.00 $75,000.00 Lower

Making the engine components internally is the best alternative. This alternative results in total
costs of $4,275,000, providing $75,000 in savings compared to the $4,350,000 cost of
outsourcing the production of the engine components to a third-party manufacturer.

The outsourcing to third-party has a negative impact on profit.

Based on the above calculations, my recommendation is for the vacuum manufacturing company
to make its engine parts as it will cost the company $75,000 less to produce 50,000 units than
buying the units from a third-party vendor.

The qualitative factors that

management should consider
when deciding whether to
outsource
production include the
following:
 Will the quality of the
products remain the same?
 Will shutting down the
manufacturing facility have a
negative impact on the morale
of
remaining employees?
 Is the producer that will be
making the product financially
stable and reliable?( Heisinger,
& Hoyle,)
The qualitative factors that management should consider when deciding whether to outsource
production include the following:
 Will the quality of the products remain the same?
 Will shutting down the manufacturing facility have a negative impact on the morale of
remaining employees?
 Is the producer that will be making the product financially stable and reliable?
( Heisinger, & Hoyle,)

References:
 Weygandt,J. Kimmel, P. Kieso,D (2012). Financial and managerial accounting. John
Wiley & Sons, Inc.
• Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for
Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html