Chapter 14, Problem 53P

Upstate Mechanical, Inc. has been producing two bearings, components T79 and B81, for use in production. Data regarding these two components follow.

*Variable manufacturing overhead is applied on the basis of direct-labor hours.

^†Fixed manufacturing overhead is applied on the basis of machine hours.

Upstate Mechanical’s annual requirement for these components is 8,000 units of T79 and 11,000 units of B81. Recently, management decided to devote additional machine time to other product lines, leaving only 41,000 machine hours per year for producing the bearings. An outside company has offered to sell Upstate Mechanical its annual supply of bearings at prices of $11.25 for T79 and $13.50 for B81. Management wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the firm can minimize costs (maximize net benefits).

Required:

1. 1. Compute the net benefit (loss) per machine hour that would result if Upstate Mechanical accepts the supplier’s offer of $13.50 per unit for component B81.
2. 2. Choose the correct answer. Upstate Mechanical will maximize its net benefits by:
   1. a.      purchasing 4,800 units of T79 and manufacturing the remaining bearings.
   2. b.      purchasing 8,000 units of T79 and manufacturing 11,000 units of B81.
   3. c.       purchasing 11,000 units of B81 and manufacturing 8,000 units of T79.
   4. d.      purchasing 4,000 units of B81 and manufacturing the remaining bearings.
   5. e.       purchasing and manufacturing some amounts other than those given above.
3. 3. Suppose management has decided to drop product T79. Independently of requirements (1) and (2), assume that the company’s idle capacity of 41,000 machine hours has a traceable, avoidable annual fixed cost of $44,000, which will be incurred only if the capacity is used. Calculate the maximum price Upstate Mechanical should pay a supplier for component B81.