Timkin Company

A Group Business Case

Presented to the Accountancy Department

De La Salle University

In partial fulfillment of the course requirements

In ACCCOB3 Section K32

SUBMITTED TO:

Ms. Mar Lauren Nicolas

SUBMITTED BY:

Cruz, Zia Maureen SP.

Cureg, Jeremi C.

He, Adel John P.

Solomon, Lauren A.

Vitug, Frances Claire S.

February 17, 2022

I. Introduction

As mentioned by the President of Timkin Company, Paul Taylor, the company’s

current equipment used in the production of subassemblies is worn out. This process of
production incurs the company with costs per unit totaled to $11.00 (specifically $2.75
for direct materials, $4.00 for direct labor, $0.60 for variable overhead, and $3.65 for
fixed overhead) with the activity level of 40,000 subassemblies per year. Given this, the
company has to make a decision and choose among two options. First, whether to rent a
more efficient new equipment that is capable of producing 60,000 subassemblies per year
with decreased direct labor costs and variable overhead costs by 25%. However, with
retention on the supervision cost of $30,000 per year and the direct materials cost per
unit. Second, to stop their current internal production of subassemblies and acquire these
instead from an outside supplier for $8 each. This situation of the company and the need
for immediate decision of what to execute among these two alternatives must take into
account all the factors to be considered, such as the differences in the company’s demand
for subassemblies in different years. Thus, the statement of the problem could be, what
should be the optimal and efficient process of production the company must perform if
the need for subassemblies is retained to 40,000, or increased to 50,000 or 60,000 per
year?
 II. Discussion and Figures

To begin solving the problem, an analysis of the two alternatives should first be analyzed. The
table below was constructed for such analysis.
Figure 1
Differential Costs Per Total Differential
Unit Costs for 40,000
Units

Make Buy Make Buy

Outside Supplier’s Side $8.00 $320,000

Direct Materials $2.75 $110,000

Direct Labor ($4.00 x 3.00 120,000

0.75)

Variable overhead 0.45 18,000

($0.60 x 0.75)

Supervision 0.75 30,000

Equipment rental 1.50 60,000

($60,00 per year/40,000
units per year)

Total $8.45 $8.00 $338,000 $320,000

If the company needs 50,000 subassemblies per year, the analysis for the problem is as follows:
Figure 2
Differential Costs Per Total Differential
Unit Costs for 50,000
Units

Make Buy Make Buy

 Outside supplier’s price $8.00 $400,000

Direct Materials $2.75 $137,500

Direct Labor $3.00 $150,000

Variable Overhead $0.45 $22,500

Supervision $0.60 $30,000

($30,000/50,000 units)

Equipment rental $1.20 $60,000

($60,000/50,000 units)

Total $8.00 $8.00 $400,000 $400,000

If the company needs 60,000 subassemblies per year, the analysis for the problem is as follows:
Figure 3
Differential Cost Per Unit Total Differential
Costs for 60,000
units

Make Buy Make Buy

Outside Supplier’s Price $8.00 $480,000

Direct Materials $2.75 $165,000

Direct Labor $3.00 $180,000

Variable Overhead $0.45 $27,000

Supervision $0.50 $30,000

($30,000/60,000 units)

Equipment Rental $1.00 $60,000

($60,000/60,000 units)
 Total $7.70 $8.00 $462,000 $480,000

III. Conclusion/Recommendations

When comparing the cost datas that we have analyzed and gathered, if the company were
to only produce 40,000 units of subassemblies, it is highly recommended that the company
pursue the action of purchasing it for $8 externally instead of producing it internally as the
Timkin could save around $18,000 (as seen from Figure 1). In short, it is generally more cost
effective to purchase it rather than produce it. However, this is only beneficial in the short term.

We could observe the change in dwindling difference in cost once the company has
produced 50,000 subassemblies. Instead of the cost of purchasing having an advantage, there is a
breakeven point where there is neither an advantage or a disadvantage between purchasing it or
producing it (see Figure 2). It is only apparent that purchasing it on the long term would exhibit a
“diseconomies of scale”. In economics, this is when cost increases with the increase in output,
it’s graph of the cost function of purchasing the subassemblies would be a strictly concave curve.
This is observable with the general decline in cost effectiveness of the purchasing of the
subassemblies as per 60,000 units (see Figure 3). The marginal cost increased by $80,000 per
incremental increase of 10,000 units when the company decided to buy. It is an entirely different
case with the production of the subassemblies as it exhibits an “economies of scale”. This is
when costs decrease as output increases. This is more favorable as price on these subassemblies
decreases as well, showing that the company has reached an efficient means of production.

It is important to define the company’s goal before deciding on what the most cost
effective means is. If the company would decide to produce more in the long term, we would
suggest the company to look into the future and negate short term losses by investing in
producing subassemblies instead of purchasing it. It is also more recommended as being able to
produce it would mean that the quality control would be more customized to fit the company’s
needs as everything would be under the company’s control. However, if the company would
decide to keep it short, in which only 40,000 units would be produced, then the rational action
would be to buy it from other suppliers. However, if the company decides to purchase after
40,000 units, for whatever reason, Timkin could have incurred debts as when it comes to
purchasing, most companies would incur liable costs, and this purchase could increase their
accounts payable and could prove to be disadvantageous (assuming that interest is included in
the payback) as the increase in cost would come with the increase in debts as well.

There are several factors that would have to be considered when Timkin has to decide.
One key factor is corporate social responsibility. An example would be the reducing of the waste
of producing these subassemblies and how it would negatively impact the environment. This has
to be kept in mind as even though costs would decrease if Timkin decides to produce it
themselves, the implicit cost would mean that waste from production could increase. Another
would be joint productions. Since subassemblies are a part of a whole, for the most part, it is
expected that it would eventually merge with another subassembly to create a whole package
(unless the subassembly itself is the finished product). The challenge for the company, then, is if
they could still maintain the economies of scale when it comes to assembling all these different
subassemblies together to form one coherent product. If they couldn’t, this is yet another issue
that the company would have to address.

IV. References (if any)

“TIMKIN COMPANY”

“That old equipment for producing subassemblies is worn out,” said Paul Taylor, president of
Timkin Company. “We need to make a decision quickly.” The company is trying to decide
whether it should rent new equipment and continue to make its subassemblies internally or
whether it should discontinue production of its subassemblies and purchase them from an outside
supplier. The alternatives follow:

● Alternative 1: Rent new equipment for producing the subassemblies for $60,000 per year.
● Alternative 2: Purchase subassemblies from an outside supplier for $8 each.

Timkin Company ’s present costs per unit of producing the subassemblies internally (with the old
equipment) are given below. These costs are based on a current activity level of 40,000
subassemblies per year:
 Direct materials $ 2.75

Direct labor 4.00

Variable overhead 0.60

Fixed overhead ($0.75 supervision, $0.90 3.65

depreciation, and $2 general
company overhead)

Total cost per unit $ 11.00

The new equipment would be more efficient and, according to the manufacturer, would reduce
direct labor costs and variable overhead costs by 25%. Supervision cost ($30,000 per year) and
direct materials cost per unit would not be affected by the new equipment. The new equipment’s
capacity would be 60,000 subassemblies per year.

The total general company overhead would be unaffected by this decision.

INSTRUCTIONS:
I. This is a group business case (maximum of 5 members)
II. From the information gathered in the case, you must then submit a written report forming
analysis, conclusions and recommendations. Incorporate the answers to the following
guide questions:

1. The president is unsure what the company should do and would like an analysis
showing the unit costs and total costs for each of the two alternatives given above.
Assume that 40,000 subassemblies are needed each year. Which course of action
would you recommend to the president?
 2. Would your recommendation in (1) above be the same if the company’s needs
were ( a ) 50,000 subassemblies per year, or ( b ) 60,000 subassemblies per year?
Show computations in good form.
3. What other factors would you recommend that the company consider before
making a decision?
III. Outline
A. Introduction
B. Discussion (Be sure to include answers to guide questions and support your
answers with computations and logical ANALYSIS).
C. Conclusion/Recommendation
D. References