Question

Soca Engineering Company manufactures a range of products. Shown below are the budgeted total unit cost...

Soca Engineering Company manufactures a range of products. Shown below are the budgeted total unit cost for one of the components and one of the products manufactured by the company.

Component ABC
per unit

Product XYZ
per unit

$

$

Direct materials

180

480

Direct labour

160

440

Variable overhead

80

220

Fixed overhead

220

600

Component ABC

640

Total

640

2380

Component ABC is incorporated into product XYZ manufactured and sold by the company. It is possible to purchase component ABC for $525 per unit from another company. The anticipated selling price of product XYZ per unit is $2750.

Fixed Overhead:

  • Soca Engineering Company will incur $125 per unit whether it purchases or manufactures component ABC.
  • The company could avoid spending $280 per unit if product XYZ was NOT produced.

Advise the management of the company whether it would be profitable to

  1. make or buy component ABC                                                                        [6 marks]

  1. accept a special offer of $1750 per unit from an outside company for product XYZ.

Provide a justification for your answer.                                                         [9 marks]

Homework Answers

Answer #1
Component ABC total Cost 640
LESS:Unavoidable Fixed Cost 125
Avoidable Cost 515
Buy Price of Component 525
i AS buy price is higher than avoidable cost so company should make component
Product XYZ total cost 2380
LESS:Unavoidable Fixed Cost 445
(320+125)
Avoidable Cost 1935
Offer price 1750
ii AS offer price is lesser than avoidable cost so company should accept offer.
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