DIFFERENTIAL ANALYSIS AND DECISION MAKING Heavy Metals produces various electronics items for use in heavy machines. The company usually produces all the necessary parts for its products. However, an outside supplier has recently offered to sell a specialized part – Part H – to the company for $31 per unit. To evaluate this offer, the company has gathered the following information regarding its own cost of producing the Part H internally: Per unit 15,000 units per year Direct materials 12 180,000 Direct Labour 12 180,000 Variable manufacturing overhead 3 45,000 Fixed manufacturing overhead (one-third belongs to supervisory salaries; two-thirds belongs to the depreciation of special equipment) 6 90,000 Required (show your calculation): i) Assuming that the company has no alternative use for the facilities now being used to produce Part H, should the outside supplier’s offer be accepted? Explain your answer. Type in answers to Question 4. a. i (expand the space as needed) ii) Suppose that if Part H were purchased, the company could use the freed capacity to launch a new product. The segment margin of the new product would be $75,000 per year. Should the company accept the offer to buy Part H for $31 per unit? Explain your answer.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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DIFFERENTIAL ANALYSIS AND DECISION MAKING

Heavy Metals produces various electronics items for use in heavy machines. The company usually produces all the necessary parts for its products. However, an outside supplier has recently offered to sell a specialized part – Part H – to the company for $31 per unit. To evaluate this offer, the company has gathered the following information regarding its own cost of producing the Part H internally:

	Per unit	15,000 units per year
Direct materials	12	180,000
Direct Labour	12	180,000
Variable manufacturing overhead	3	45,000
Fixed manufacturing overhead (one-third belongs to supervisory salaries; two-thirds belongs to the depreciation of special equipment)	6	90,000

Required (show your calculation):

i) Assuming that the company has no alternative use for the facilities now being used to produce Part H, should the outside supplier’s offer be accepted? Explain your answer.

Type in answers to Question 4. a. i (expand the space as needed)

ii) Suppose that if Part H were purchased, the company could use the freed capacity to launch a new product. The segment margin of the new product would be $75,000 per year. Should the company accept the offer to buy Part H for $31 per unit? Explain your answer.

Type in answers to Question 4. a. ii. (expand the space as needed)

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