Question

Required information [The following information applies to the questions displayed below.] Upstate Mechanical, Inc. has been producing two bearings, components 179 and B81, for use in production. Data regarding these two components follow. 179 2.5 B81 3.0 $ 2.25 4.00 $ 3.75 4.50 Machine hours required per unit Standard cost per unit: Direct material Direct labor Manufacturing overhead Variable Fixed Total 2.00 3.75 $12.00 2.25 4.50 $15.00 "Variable manufacturing overhead is applied on the basis of direct-labor hours. "Fixed manufacturing overhead is applied on the basis of machine hours. Upstate Mechanical's annual requirement for these components is 8,000 units of T79 and 11,000 units of B81. Recently, management decided to devote additional machine time to other product lines, leaving only 41,000 machine hours per year for producing the bearings. An outside company has offered to sell Upstate Mechanical its annual supply of bearings at prices of $11.25 for T79 and $13.50 for B81. Management wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the firm can minimize costs (maximize net benefits). Required: 1. Compute the net benefit (loss) per machine hour that would result if Upstate Mechanical accepts the supplier's offer of $13.50 per unit for component B81. per machine hour if component B81 is purchased is

Answer 1

Solution:

Variable cost of making B81 = 3.75+ 4.50 + 2.25 = $10.50

Purchase price offered = $13.50 per unit

Loss per unit if supplier's offer is accepted = $10.50 - $13.50 = - $3 per unit

Machine hours per unit of B81 = 3 hours

Therefore,

Loss per machine hour if supplier's offer is accepted = - $3 / 3 = - $1 per machine hour