Bendix Ltd is considering the alternatives of either purchasing component VX-1 from an outside supplier or producing the component itself. Production costs to Bendix are estimated at:

An outside supplier, Cosmo PLC, has quoted a price of £1,000 for each VX-1 for an order of 100 of these components. However, if Bendix accepts the quote from Cosmo, the company will need to give three months’ notice of redundancy to staff.

• Calculate the relevant costs of the alternative choices (show your workings)
and make a recommendation to management as to which choice to accept.

• How would your recommendation differ if Bendix employees were on temporary contracts with no notice period?

• Explain the significance of a stock valuation of £1,300 for the VX-1 at the end of the last accounting period.

Transcribed Image Text:

Direct labour 200 Direct materials 600 Variable overheads 100 Fixed overheads 300 Total 1,200