Copy\" 0 omice Update To keep up-to-date with securty updates, fxes, and improve
ID: 2398894 • Letter: C
Question
Copy" 0 omice Update To keep up-to-date with securty updates, fxes, and improvements, choose Check for Upda ABC Company is currently manufacturing Part A8 for a few of its products. The inancial data pertaining to A8 is as follow Annual production volume Per Unit Cost: Direct materials Direct labor Variable manufacturing overhead$2.25 Fixed manufacturing overhead Total manufacturing costs 52,500 units 10 $ 9.00 $3.00 12 13 14 15 16 17 18 19 20 21 $ 4.50 18.75 Of the fixed manufacturing overhead assigned to Part A10, a certain component is direct fixed overhead and the remaining is common fixed overhead Direct fixed overhead s 115,500 An outside supplier has offered to sell the part to ABC Company for the price of $ 16.50 Required: company decides to buy the model from the supplier 23 24 25 a) Compute the change in operating income if ABC (4 Marks) 26 27 28 29 b) 30 31 32 What is the most ABC Company would be willing to pay an outside supplier? (1 Mark) 34 35 36 c) 37 What qualitative factors are important for the company to consider buying from the supplier (2 Marks for concepts and 2 Marks for communication) (4 Marks) 39 Sheett Sheet3 + ReadyExplanation / Answer
Qa) Common fixed overhead can’t be avoided; therefore, it is not relevant in decision making and should not be considered. Only the direct fixed overhead should be considered, since it is relevant.
Total cost per unit if making = Total variable cost per unit + Direct fixed overhead per unit
= (9 + 3 + 2.25) + (115,500 / 52,500)
= 14.25 + 2.2
= 16.45
Total cost per unit if buying = 16.50
Therefore, if it is bought the spending becomes more; it indicates a negative change in income.
Change in income = (Making cost – Buying cost) × Number of units
= (16.45 – 16.50) × 52,500
= -0.05 × 52,500
= - 2,625 (Answer)
Qb) The company can offer at most the making cost; if it is higher than that, the offer should not be accepted.
Willing to pay = $16.45
Qc) Qualitative factors: These are non-financial factors.
Consistency: The supplier must have the capacity of supplying on regular basis. There should not be any interruption, because this is the question of company’s business.
Standard: There should not be any compromisation with products quality, since this is the question of company’s reputation in the market.
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