Butchers Meats manufactures a conveyor belt for its manufacturing division. The

Question

Butchers Meats manufactures a conveyor belt for its manufacturing division. The cost per unit for 10,000 units of this conveyor belt are as follows:

PART – CONVEYOR BELT

Direct materials

$ 6

Direct labour

10

Variable factory overhead

8

Fixed factory overhead

4

Total costs

$28

The fixed factory overhead costs are unavoidable.

1. Plastics Forming Limited has offered to sell 10,000 units of the same conveyor belt to Butchers Meats for $26 a unit. If there is no further use for the building, what do you think would be a the best option for Butchers Meats?

A. Buy from Plastics Forming Limited since this would save $2 per unit

B. Make the conveyor belt as this would save $2 per unit

C. Buy from Plastics Forming Limited since this would save $10 per unit

D. Make the conveyor belt since this would save $10 per unit

2. What would be the highest price that Butchers Meats should pay for the conveyor belt assuming no other use of their building?

A. $28

B. $22

C. $24

D. $16

PART – CONVEYOR BELT

Direct materials

$ 6

Direct labour

10

Variable factory overhead

8

Fixed factory overhead

4

Total costs

$28

Explanation / Answer

If there is no other use of their building then variable factory overheads also become the unavoidable expense.

A. cost of making = 28 per unit

cost of purchase = 26 + 8 ( variable factory cost ) + 4 (fixed factory cost ) = 38 per unit

so company should make the product as that will save 10 per unit. (D)

B. Highest price that should pay for product = Total cost - unavoidable costs = 28 - 8 - 4 = 16 per unit. (D)

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