The management of Springer plc is considering next year’s production and purchase budget. One of the components produced by the company, which is incorporated into another product before being sold, has budgeted manufacturing costs as follows: $ Direct Material 14 Direct labour (4 hours at $3 per hour) 12 Variable overhead (4 hours at $2 per hour) 8 Fixed overheads (4 hours at $5 per hour) 20 Total Cost $54 per unit Trigger plc has offered to supply the above component at a guaranteed price of $50 per unit.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
The management of Springer plc is considering next year’s production and purchase budget.
One of the components produced by the company, which is incorporated into another product before being sold, has budgeted
$
Direct Material 14
Direct labour (4 hours at $3 per hour) 12
Variable overhead (4 hours at $2 per hour) 8
Fixed
Total Cost $54 per unit
Trigger plc has offered to supply the above component at a guaranteed price of $50 per unit.
Required:
- Considering cost criteria only, advise management whether the above component should be purchased from Trigger plc. Any calculation should be shown and assumptions made, or aspects which may require further investigation should be clearly stated.
- Explain how your advice would be affected by the following:
“As a result of recent government legislation if Springer plc continues to manufacture this component, the company will incur additional inspection and testing expenses of $56,000 per annum, which are not included in the above budgeted manufacturing costs.”
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