Marty Monitors Ltd., a manufacturer of computer monitors, currently produces a 1

ID: 2484192 • Letter: M

Question

Marty Monitors Ltd., a manufacturer of computer monitors, currently produces a 19-inch LCD monitor. The company's accounting department has reported the following annual costs of producing the LCD monitor internally. An external supplier has offered to provide Marty Monitors 6,000 units of the same LCD monitor per year at a price of $46 each. Also consider the following information: The LCD manufacturing equipment has no salvage value and has no other use aside from producing the 19-inch LCD monitors. It cannot be sold. The fixed overhead costs allocated to the LCD monitors are common to all items produced in the factory. The production supervisor will take over duties in another department if the monitors are purchased from the external supplier. If this is the case, his annual salary will drop to $27,000. Should the company continue manufacturing the monitors internally or begin purchasing them from the external supplier?

Explanation / Answer

Answer

Figures in $

Particulars

Amount

External supplier's price

Depreciation on LCD equipment

Allocated fixed overhead costs

Saving in Production supervisor salary

-0.5

(30000-27000)/6000

Total cost per unit of LCD monitor if purchased from outside (a+b+c+d)

61.5

Answer : If Company manufactures LCD monitor internally, Cost per unit of LCD monitor is $ 75.00. So company should begin purchasing them from the external supplier.