Ashville Manfuraturing Ltd. produces construction equipment and several components for the construction industry. Part of its manufacturing includes a component (QR20) that it uses in several of its equipment. Ashvilles management is considering whether to continue manufacturing theses components on its premises or to purchase them from an outside source. The following information is available:

a- The company needs 6,000 of these components annually. These components (QR20) can be purchased from an outside supplier at a cost of $15 per component.

b- The unit cost of manufacturing this component is $35, computed as follows:

Direct materials

$ 50,000

Direct labor

65,000

Factory overhead:

Variable

35,000

Fixed

60,000

Total manufacturing costs

$210,000

Cost per unit ($210,000 6,000 components)

$ 35

c- Discontinuing the manufacture of the components (QR20) will eliminate all the raw materials and direct labor costs but will eliminate only 70% of the variable factory overhead costs.

d- If the components (QR20) are purchased from an outside source, machinery used in the production of components will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale of this machinery would also eliminate $3,000 of the fixed costs associated with depreciation and taxes. No other reductions in fixed factory overhead will result from discontinuing the production of components.

Required:

1- Determine the incremental cost or benefit of buying the component (QR20) from the outside supplier. Would you recommend that Ashville manufactures these components or purchases them from the outside source? (Prepare a schedule to determine the incremental cost or benefit of buying the components from outside supplier). (25 marks)

2- Assume that if the component (QR20) are purchased from the outside source, the factory space previously used to produce this component can be used to manufacture an additional 4,000 units of another component (QD33) per year. These components (QD33) have an estimated contribution margin of $8 per unit. The manufacture of these additional components (QD33) would have no effect on fixed factory overhead. Would this new assumption change your recommendation as to whether to make or buy the original components (QR20)? In support of your conclusion, prepare a schedule showing the incremental cost or benefit of buying the compnent (QR20) from the outside source and using the factory space to produce the additional components (QD33). (10 marks)

3- What nonfinancial concerns should Ashville Manufacturing Ltd. take into consideration? (5 marks)