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Should the component be purchased and production stopped ?

Should the component be purchased and production stopped ?

FINANCIAL ACCOUNTING
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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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.
Transcribed Image Text: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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