Bancroft currently manufactures a subcomponent that is used in its main product.
ID: 2562870 • Letter: B
Question
Bancroft currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $122. Bancroft currently produces 20,800 subcomponents at the following manufacturing costs:
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?
c. Now assume Bancroft would avoid $322,000 in equipment leases and salaries if the subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?
Explanation / Answer
a. If Bancroft has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier?
The Profit would be Lower as Variable cost to Manufacture the component comes to $ 109 (42+30+37) and supply price of the component comes to $ 122. Therefore, Profit will be lesser as cost of buying component is more than cost to manufacture a component.
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?
The Maximum price that they are willing to pay the supplier will be its variable costs to manufacture ie., $ 109.
c. Now assume Bancroft would avoid $ 322,000 in equipment leases and salaries if the subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?
Even though we are saving $ 322,000 in fixed expenses, the variable cost to manufacture come to $ 109 which is lessthan Cost of purchasing the component. Therefore, profits would be lower if we buy a component from the supplier
a. If Bancroft has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier?
The Profit would be Lower as Variable cost to Manufacture the component comes to $ 109 (42+30+37) and supply price of the component comes to $ 122. Therefore, Profit will be lesser as cost of buying component is more than cost to manufacture a component.
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