Blasingham Company is currently manufacturing Part Q108, producing 35 000 units
ID: 2339068 • Letter: B
Question
Blasingham Company is currently manufacturing Part Q108, producing 35 000 units annually. The part is used in the production of several products made by Blasingham. The cost per unit for Q108 is as follows:
Direct materials
$ 6.00
Direct labour
2.00
Variable overhead
1.50
Fixed overhead
3.50
Total
$13.00
All of the fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Blasingham for $11. There is no alternative use for the facilities currently used to produce the part.
REQUIRED:
1 Should Blasingham Company make or buy Part Q108?
2 What is the most Blasingham would be willing to pay an outside supplier?
3 If Blasingham buys the part, by how much will income increase or decrease?
Direct materials
$ 6.00
Direct labour
2.00
Variable overhead
1.50
Fixed overhead
3.50
Total
$13.00
Explanation / Answer
Hello! Hope this would answer your question. Feel free to comment in case of any query.
If Blasingham Company makes the part, it has a cost of $13 that is given in the question.
If Blasingham Company buys the part, it has a cost of $ 14.5 that is Cost to buy the part from supplier + fixed overhead ($11+ $3.5).
Based on these calculations:
1. Blasingham Company should make the part as the cost of making the part is lesser than buying the part.
2. Blasingham would be willing to pay an outside supplier the same amount that it requires to make the part at its bare minimum cost that is $13.
3. If Blasingham buys the part, income will decrease by $1.5 that is Price of Buying less Price of Making ($14.5-$13).
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