Question

Tent Pty Ltd is a manufacturer of roof-mounted pop-up tents. Currently the firm manufactures the steel supporting frames internally. The cost per unit to manufacture these frames internally are as follows:

Direct materials	$50.00
Direct labour	$28.00
Variable overhead	$20.00
Fixed overhead	$50.00

An external supplier has offered to produce 5,000 frames for $110.00 per unit. $25,000 in fixed overhead will be avoided if this offer is accepted.

Required:

1. On financial grounds, is the above proposal acceptable?
2. What qualitative factors should be recognised in the analysis of this decision?
3. Overall, should the offer be accepted?

Answer 1

ANSWER

Financial advantages (disadvantage) = Manufacturing cost - purchase cost

= {(50+28+20)*5000 +25000} - 5000*110

= $(35000)

Offer should not be accepted.

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