ACC 420 Assignment 2

Question 1

Management of ABC is evaluationg whether the company should continuemanufacturing a component or buy it from an outside supplier. Based on its accounting recordsit appears that it costs the company $80 per unit to make it. The $80 cost per component was determined as follows

$

Direct Materials	16
Direct Labour	30
Variable manufacturing overhead	12
Fixed manufacturing overhead	22
Unit cost	80

ABC uses 10000 components per year. After a company [XYZ] submitted a bid of $70 per component , some of ABCmanagers felt that they can save money by buying the component from XYZ than manufacturing it .

If component is obtained from XYZ $5 of fixed manufacturing overhead per unit can be avoided and the unused production facilities can be leased to another company for $30000 per year

Instructions how to do this problem

1. Calculate the total cost if the component is bought

Total Price + Reduced manufacturing cost the additional revenue

2. Calculate the cost of manufacturing

Total DM+

Total DL

Total variable overhead

Total Fixed cost

3. Compare the two costs and see which is better