Question

Brown and Whin Ltd. (BWL) manufactures a wide range of automobile parts. BWL components are also found in many specialised gear applications such as: motors and agricultural equipment.   BWL produces two components T1 and T2 for use in the production of sports cars. Unit costs regarding these two components are as follows:

	T1	T2
Machine hours required per unit	2	4
Direct material	$ 10.00	$ 17.00
Direct labour	20.00	20.00
Variable manufacturing overhead	8.00	10.00
Fixed overhead	16.00	20.00

BWL’s annual requirement for these components is 7,000 units of T1 and 10,000 units of T2. Recently, in an attempt to minimise costs, management decided to devote additional machine time to other product lines, leaving only 42,000 machine hours per year for producing components T1 and T2. An outside company has offered to sell BWL its annual requirement of these components at prices of $62.00 for T1 and $79.00 for T2.

1. Compute the net benefit or loss per unit that would result if BWL accepts the supplier’s offer of $79 per unit for component T2 (assuming all the requirements of T2 can still be met despite the machining constraint).
2. Given the limitation of 42,000 machine hours, BWL management is exploring the   best possible use of this limited resource to maximise the benefits to the company. Independent of part (a), using $62.00 as the selling price for T1 and $79.00 as the selling price for T2, specify how many units of each component should be made and how many should be bought to achieve the above objective. Show all calculations.

Answer 1

	T1	T2
Direct material	$10.00	$17.00
Direct labour	20	20
Variable manufacturing overhead	8	10
Variable manufacturing cost per unit	38	47
Outside Price per unit	62	79
Net Benefit/(Loss) per unit	-24	-32
b.
	T1	T2
Net Benefit/(Loss) per unit	-24	-32
Number of machine hours per unit	2	4
Loss per hour	-12	-8
Hence, T1 must be produced first as loss per hour is higher, remaining hours will be used to produce T2
	T1	T2
Units to be made	7000	7000
Units to be bought		3000