Intermediate: Make or buy decision The management of Springer pic is considering next year’s production and purchase budgets.

One of the components produced by the company, which is incorporated into another product before being sold, has a budgeted manu¬ facturing cost as follows:

Trigger pic has offered to supply the above com¬ ponent at a guaranteed price of £50 per unit.
Required:

(a) Considering cost criteria only, advise manage¬
ment whether the above component should be purchased from Trigger pic. Any calculations should be shown and assumptions made, or aspects which may require further investiga¬ tion should be clearly stated. (6 marks)

(b) Explain how your above advice would be affected by each of the two separate situations shown below.
(i) As a result of recent government legisla¬
tion if Springer pic continues to manu¬ facture this component the company will incur additional inspection and testing expenses of £56000 per annum, which are not included in the above budgeted manufacturing costs. (3 marks)
(ii) Additional labour cannot be recruited and if the above component is not manu¬ factured by Springer pic the direct labour released will be employed in increasing the production of an existing product which is sold for £90 and which has a budgeted manufacturing cost as follows:

All calculations should be shown.

(c)The production director of Springer pic recently said:
‘We must continue to manufacture the component as only one year ago we purchased some special grinding equip¬ ment to be used exclusively by this component. The equipment cost £100 000, it cannot be resold or used elsewhere and if we cease production of this component we will have to write off the written down book value which is £80000.’
Draft a brief reply to the production director commenting on his statement.

Transcribed Image Text:

Direct material Direct labour (4 hours at 3 per hour) Variable overhead (4 hours at 2 per hour) Fixed overhead (4 hours at 5 per hour) Total cost () 14 12 8 20 54 per unit