Being a finance Manager advice the top management that KPR should manufacture the AQ product internally or they should buy AQ product from outside supplier.
KPR manufactures 30,000 units of part AQ each year for use on its production line. At this level of activity, the cost per unit for part AQ is:
Direct materials . . . . . . . . . . . . . . . . . . . . . Rs 3.60
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . 10.00
Variable manufacturing
Fixed manufacturing overhead . . . . . . . . . 9.00
Total cost per part . . . . . . . . . . . . . . . . . . . Rs 25.00
An outside supplier has offered to sell 30,000 units of part AQ. each year to KPR for Rs 21 per part. If KPR accepts this offer, the facilities now being used to manufacture part AQ could be rented to another company at an annual rental of Rs 80,000. However, KPR has determined that two-thirds of the fixed manufacturing overhead being applied to part AQ would continue even if part AQ were purchased from the outside supplier.
Required
Being a finance Manager advice the top management that KPR should manufacture the AQ product internally or they should buy AQ product from outside supplier.
(B)
KPR manufactures, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:
in Rs
Departments
Total
Hardware
Linens
Sales
40,00,000
30,00,000
10,00,000
Variable expenses
13,00,000
9,00,000
4,00,000
Contribution margin
27,00,000
21,00,000
6,00,000
Fixed expenses
22,00,000
14,00,000
8,00,000
Net operating income (loss)
5,00,000
7,00,000
-2,00,000
A study indicates that Rs 340,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 10% decrease in the sales of the Hardware Department.
Required:
If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?
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