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The B Company produces a part that is used in the final assembly of its main product. Two manufacturing operations are required to produce the part. Typical annual production of the part is 400,000 units. The estimated current costs are as

The B Company produces a part that is used in the final assembly of its main product. Two manufacturing operations are required to produce the part. Typical annual production of the part is 400,000 units. The estimated current costs are as

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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The B Company produces a part that is used in the final assembly of its main product. Two manufacturing operations are required to produce the part. Typical annual production of the part is 400,000 units. The estimated current costs are as follows: Operation 1 Operation 2 Materials P240,000 Direct labor 180,000 P180,000 Variable overhead 100,000 100,000 Fixed overhead (allocated) 120,000 60,000 Operation 1 can be eliminated if these parts are purchased from an outside vendor. The vendor will supply 400,000 units a year at P2.00 per unit. These parts would still have to be processed through Operation 2. The B Company would have to pay freight charges of P20,000 a year on the purchased parts. If Operation 1 is eliminated, the space can be rented for P25,000 per year. REQUIRED: 1. Should the company purchase the parts or continue making them internally? Use the total approach first. Then use the incremental analysis next.
Transcribed Image Text:The B Company produces a part that is used in the final assembly of its main product. Two manufacturing operations are required to produce the part. Typical annual production of the part is 400,000 units. The estimated current costs are as follows: Operation 1 Operation 2 Materials P240,000 Direct labor 180,000 P180,000 Variable overhead 100,000 100,000 Fixed overhead (allocated) 120,000 60,000 Operation 1 can be eliminated if these parts are purchased from an outside vendor. The vendor will supply 400,000 units a year at P2.00 per unit. These parts would still have to be processed through Operation 2. The B Company would have to pay freight charges of P20,000 a year on the purchased parts. If Operation 1 is eliminated, the space can be rented for P25,000 per year. REQUIRED: 1. Should the company purchase the parts or continue making them internally? Use the total approach first. Then use the incremental analysis next.
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