ABC Company (ABC) currently produces 6,000 units of M1 (a component uses in many electric appliances) per year under normal capacity and sells M1 at $66 per unit. The company is considering the possibility to buy a similar component from an outside supplier. If ABC accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but 60% of the fixed manufacturing overhead will have to be absorbed by other products. The released factory equipment could be used to produce a net income of $66,000. The cost to produce M1 is as follows. Direct materials $105,000 Direct labor $45,000 Total overhead $90,000. The total overhead costs include variable handling costs of $5 per unit. The remainder of the overhead costs consists of 10% variable costs and 90% fixed costs. A very good foreign manufacturer, 3Z Company (3Z) has offered to sell the component at $36 per unit, plus $0.5 shipping cost per unit. GQ Company (GQ), a new local manufacturer, has also offered to sell the component for $33 each. a. Prepare an incremental analysis showing whether ABC should make or buy M1 from 3Z or GQ. State your selection and explain in detail. b. Ignore part (a). ABC identifies M1 can be further processed into M2, a high-end component. M2 can be sold for $75 per unit. The estimated cost of processing further is $13,000. Using incremental analysis, should M1 be processed further? Explain. c. Based on your analysis in (a) and (b), what decisions should the management of ABC make? What other factors should they consider in making their decisions?
ABC Company (ABC) currently produces 6,000 units of M1 (a component uses in many electric appliances) per year under normal capacity and sells M1 at $66 per unit. The company is considering the possibility to buy a similar component from an outside supplier. If ABC accepts the supplier’s offer, all variable
The cost to produce M1 is as follows.
Direct materials $105,000 Direct labor $45,000
Total overhead $90,000.
The total overhead costs include variable handling costs of $5 per unit. The remainder of the overhead costs consists of 10% variable costs and 90% fixed costs.
A very good foreign manufacturer, 3Z Company (3Z) has offered to sell the component at $36 per unit, plus $0.5 shipping cost per unit. GQ Company (GQ), a new local manufacturer, has also
offered to sell the component for $33 each.
a. Prepare an incremental analysis showing whether ABC should make or buy M1 from 3Z or GQ. State your selection and explain in detail.
b. Ignore part (a). ABC identifies M1 can be further processed into M2, a high-end component. M2 can be sold for $75 per unit. The estimated cost of processing further is $13,000. Using
incremental analysis, should M1 be processed further? Explain.
c. Based on your analysis in (a) and (b), what decisions should the management of ABC make? What other factors should they consider in making their decisions?
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