Auto Parts Ltd. has an annual production of 90,000 units for a motor component. The component'scost structure is as below :Per unit$Materials270Labour (25% fixed)180Expenses :Variable90Fixed135675(a) The Purchase Manager has an offer from a supplier who is willing to supply the component at $540. Should the component be purchased and production stopped ?(b) Assume the resources now used for this component's manufacture are to be used to produceanother new product for which the selling price is $ 485. In the latter case, material price will be $ 200per unit. 90,000 units of this product can be produced at the same cost basis as above for labour andexpenses. Discuss whether it would be advisable to divert the resources to manufacture that newproduct, on the footing that the component presently being produced would, instead of beingproduced, be purchased from the market.

In relevant costing, in order to decide whether the Company should buy the product or do it's in…

Answered: Should the component be purchased and…

Business

Accounting

Should the component be purchased and production stopped ?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Auto Parts Ltd. has an annual production of 90,000 units for a motor component. The component's
cost structure is as below :
Per unit
$
Materials
270
Labour (25% fixed)
180
Expenses :
Variable
90
Fixed
135
675
(a) The Purchase Manager has an offer from a supplier who is willing to supply the component at $
540. Should the component be purchased and production stopped ?
(b) Assume the resources now used for this component's manufacture are to be used to produce
another new product for which the selling price is $ 485. In the latter case, material price will be $ 200
per unit. 90,000 units of this product can be produced at the same cost basis as above for labour and
expenses. Discuss whether it would be advisable to divert the resources to manufacture that new
product, on the footing that the component presently being produced would, instead of being
produced, be purchased from the market.

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