CASE STUDY NO.

10
GORDON ENGINEERING COMPANY

3rd
Term
2014

Answer to Case Questions

1. What are the factors should be considered in determining whether to
make or buy?
With regard to this decision to make or buy a certain machine or
product many factors should be consider before making a decision. The
following are the factors:
Role of Fixed Costs. Fixed costs are sunk costs. What is sunk cannot
be retrieved in the same condition. Fixed costs cannot be reversed, without
loss. Machinery purchased, already, cannot be sold, without loss, in terms of
money. Fixed costs that are incurred are not relevant for our decision-making.
Costs that will be incurred, in any event, should not be considered in the
decision-making. In other words, the existing fixed costs, which cannot be
saved, do not influence the decision as those costs are already incurred and
cannot be reversed, whether the firms makes or buys.
Compare the saved costs with the corresponding market price for
decision-making to buy or continue to produce. Costs that can be saved are
only Variable Costs. So, compare variable costs with market price for decision
making, when the machinery turns to be idle. This decision will be always a
comparison between two options and choose the best option for the company
to stay profitable.
2. Should the company continue to have the legs painted, assembled and
packaged outside or should this operation be done in Gordon plant?
The Gordon engineering company should continue with Fowler
Company in painting, assembling and packaged the materials even though
there are little difficulties on quality. In connection with this, they should make
a contract that contains their specifications and rules on quality assurance for
them to have their desired output.
3. If the company is experiencing unsatisfactory quality in the painting,
assembly and packaging work, what action would you recommend be
taken to control it?
Based on the difficulties that they were experiencing, i would like to
recommend having an in-house supplier that they can easily consult with
quality that they are providing from day to day basis. This will help them save
travel cost and as well as inventory.
4. Why do you think the production manager opposed the purchase of the
grinder?
The production manager is opposing the proposal to buy the grinder
because it was not yet proven to him the return of investment that the
machine will have. In addition this should be clearly discussed to him because
this will be the measure if he will say yes to the grinder.

PRODUCTION AND OPERATIONS MANAGEMENT |

EMG213

COM

3rd
Term
2014

CASE STUDY NO. 10

GORDON ENGINEERING COMPANY

5. What action would you recommend regarding the grinder?

Price of the grinder
$
18,000.00

Trade-in Equipment
$
6,600.00

New Price of the

grinder
$
11,400.00

In view of the above table, we can see the price of the grinder is much
lower because of the trade in equipment. Based on this I will not recommend
this new grinder because it is an additional cost together with this there is also
a freight cost of $1.00 per table each way.
6. These are typical make or buy decisions. Prepare a make or buy policy
statement, a standard procedure and an analysis from to guide the
company in such decisions.
A(Special Tool in
grinding)

Fixed cost
Direct Labor
Wheel Wear
Coolants and Miscellaneous
Cost
Overhead (150% of the
direct labor)
Transportation Cost
Equipment Cost
Price of the grinder
Trade-in Equipment
New Price of the grinder

B(Buying the
Grinder)

1.08

2.5
2
0.6

1.62

3.75

0.12

0.1

1400

18000
-6600
11400

1402.82

22808.95

Based on the table above we can see that adding a special grinding
will be sufficient to suffice their requirements.

PRODUCTION AND OPERATIONS MANAGEMENT |

EMG213

COM