Question

Currently, Bombardeer manufactures all parts used in these engines (including starter assemblies). Your friend Sukhdeep, who also went to Yorkville University, (he did not graduate as he rarely attended classes, and had been written up for academic misconduct on several occasions), works as a sales representative at Trident Inc. and has proposed to sell your company starter assemblies that are used in Bombardeer’s engines.

The starter assemblies are currently manufactured in Plant 7 of Bombardeer Inc. The costs relating to the starter assemblies were as follows:

Direct materials 700,000

Variable direct manufacturing labour 600,000

Manufacturing overhead. 900,000

Total 2,200,000

Plant 7 manufactured 176,000 starter assemblies. The average cost for each starter assembly is $12.50.

You conduct further analysis and discover that 38% of manufacturing overhead is variable. Of the fixed portion, $300,000 is an allocation of general overhead that will remain unchanged for the company as a whole if production of the starter assemblies is discontinued. A further $250,000 of the fixed overhead is avoidable if production of the starter assemblies is discontinued. The balance of the current fixed overhead, $100,000, is the division manager’s salary. If Bombardeer discontinues production of the starter assemblies, the manager of Plant 7 will be transferred to Plant 2 at the same salary. This move will allow the company to save the $70,000 salary that would otherwise be paid to attract an outsider to this position.

You just found out that your friend Sukhdeep had been fired from his current job at Trident Inc. as he had continued to behave in an inappropriate manner. He would not show up to work and often mislead his customers (as he did his teachers at Yorkville). This conduct was not tolerated at Trident Inc., as this is a very reputable company

Required

1. Trident Inc, a reliable supplier, has offered to supply starter-assembly units at $10 per unit. Because this price is less than the current average cost of $12.50 per unit, the vice president of manufacturing is eager to accept this offer. On the basis of financial considerations alone, should Bombardeer accept the outside offer? Show your calculations.

2. How, if at all, would your response to requirement 1 change if the company could use the vacated plant space for storage and, in so doing, avoid $150,000 of outside storage charges currently incurred? Why is this information relevant or irrelevant?

Answer 1

page-01 Evaluation of make us Buy Answer Required (3 Should Bombardeer accept the outside offer Differential Make Direct material Buy impaut &700000 Direct labour $700000 $ 600000 $600000 variable manufauturing overheads $ 342000 $342000 Avoidable Overheads $250000 $ 250000 purchase cost (176000x$10) $1760000 -1760000 Total relevant costs $1892000 $1260000 $ 132000 condusion: The component should purchased externally since the cost to purchase is lower @) Make #1892000 Differential impaut $132000 $150000 Bwy 51760800 - $1150000 $1610000 Total gelowant costs oppurtunity cost Total relevant costs $1892000 $282000 The cost to buy is lower than wst to make The information is relevant since it is the oppurtunity cost of buying the component from external supplier oppurtunity cost increases cost cost of cost of buying The making or reduces