Bancroft currently manufactures a subcomponent that is used in its main product.

Question

Bancroft currently manufactures a subcomponent that is used in its main product. A supplier has offiered to supply all the subcomponents needed at a price of $120. Bancroft currently produces 20,300 subcomponents at the following manufacturing costs: Per unit $ 43 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead 38 Unit cost a. If Bancroft has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier? b. If Bancroft has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier? per units c. Now assume Bancroft would avoid $323,000 in equipment leases and salariesthe subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?

Explanation / Answer

a.

Relavent costs per unit produce = Direct materials + Direct labour + Variable maufacturing

= 43 + 33 + 38

= 114

Financial disadvantage = (120 - 114) * 20,300 = 121,800

b.

Maximum Price = Relavent costs to per unit to produce = 114

c.

Relavent costs to produce = Direct materials + Direct labour + Variable maufacturing + Avoidable fixed costs

= (43 * 20,300) + (33 * 20,300) + (38 * 20,300) + 323,000

= 872,900 + 669,900 + 771,400 + 323,000

= 2,637,200

Relavent cost to buy = 20,300 units * 120 per unit

= 2,436,000

Financial advantage = 2,637,200 - 2,436,000 = 201,200

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