Question

This is one question type for management accounting type question :

Sydney Sussex Street (SSS) Company manufactures car steering wheels that it uses in the production of its designer motorcycles. When SSS produces 11,900 steering wheels, the costs per steering wheel are:

      Direct materials (DM)                                                      $1.86

      Direct manufacturing labor (DL)                                     $4.10

      Manufacturing overhead/Indirect costs (Variable)          $2.60

      Manufacturing overhead/Indirect costs (Fixed)             $2.70

                                                                Total                      $11.26

Armidale Parts Manufacturing (APM) Company recently offered to produce and sell to SSS 11,900 car steering wheels of similar specifications for $10.00 per unit. If SSS accepts the offer, it could utilize the manufacturing facilities saved to produce tow bars that would result in a net savings of $13,900. In addition, SSS will be able to eliminate/avoid $1.75 per unit of the fixed manufacturing overhead that it normally incurs when producing the steering wheels in-house.

SSS is currently evaluating as to whether it should accept APM’s offer or reject it.

Required:   

a.   Work out SSS’s per steering wheel manufacturing costs that are ‘relevant’ to the decision under consideration?

b.   On financial considerations alone, should SSS accept APM’s offer or reject it? By how much amount is the chosen alternative lucrative to SSS? Show all necessary calculations. For this requirement use the following format/table to work out your answer (Hint: Under the ‘Effect of Buying decision’ column, for each row, indicate ‘decrease in cost’ as a positive figure and ‘increase in cost’ as a negative figure; this will help you determine whether the ‘net effect’ of the ‘buy’ decision was costlier or cheaper for SSS):

                                                        Make                  Buy                   Effect of Buying Decision

      Purchase cost …………………………………. $                            $

      Savings in space ……………………………… $                           $                            

      Direct materials …………… $                                                          $     

      Direct mfg. labor ………….. $                                                         $     

      Variable overhead ………… $                                                         $      

      Fixed overhead saved …….. $                                                          $    

            Totals ……………

                                                                                   

Your decision, based on your calculations/working out:

The best alternative is to …..

Answer 1

Solution :

(a) Relevenat Cost per Steering Wheel :

Direct Material	$ 1.86
Direct Labor	$ 4.10
Variable Manufacturing OH	$ 2.60
Avoidable Fixed Manufacturing OH	$ 1.75
Relevant Cost per Wheel	$ 10.31

(b) Net Effect of Buy Decesion :

	Make	Buy	Effect of Buying Decision
Purchases Cost (11,900 * $ 10)		$ 119,000	($ 119,000)
Saving in Space		($ 13,900)	$ 13,900
Direct Material (11,900 * $ 4.10)	$ 22,134		$ 22,134
Direct Manufaturing Labor (11,900 * $ 4.10)	$ 48,790		$ 48,790
Variable OH (11,900 * $ 2.60)	$ 30,940		$ 30,940
Fixed OH (11,900 * $ 1.75)	$ 20,825		$ 20,825
Totals	$ 122,689	$ 105,100	$ 17,589

(c) The best alternative is to Buy, as it will save cost by $ 17,589.

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