Brighton Industries has been producing two bearings, components B12 and B18, for use in production. Data regarding these two components are as follows:

B12

B18

Machine hours required per unit

2.5

3.0

Standard cost per unit:

Direct material

$ 4.50

$ 7.50

Direct labour

8.00

9.00

Manufacturing overhead:

Variable*

4.00

4.50

Fixed

7.50

9.00

$24.00

$30.00

* Variable manufacturing overhead is applied on the basis of direct labour hours.

Fixed manufacturing overhead is applied on the basis of machine hours.

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Brighton's annual requirement for these components is 8000 units of B12 and 11 000 units of B18. Recently, Brighton's management decided to devote additional machine time to other product lines, leaving only 41 000 machine hours per year for producing the bearings. An outside company has offered to sell Brighton its annual requirement of the bearings at prices of $22.50 for B12 and $27.00 for B18. Brighton wants to schedule the otherwise idle 41 000 machine hours to produce bearings so that the firm can minimise costs (maximise net benefits).

Required:

Calculate the net benefit (loss) per machine hour that would result if Brighton Industries accepts the supplier's offer of $27 per unit for component B18.

Choose the correct answer.

Brighton Industries will maximise its net benefits by:

(a) purchasing 4800 units of B12 and manufacturing the remaining bearings

(b) purchasing 8000 units of B12 and manufacturing 11 000 units of B18

(c) purchasing 11 000 units of B18 and manufacturing 8000 units of B12

(d) purchasing 4000 units of B18 and manufacturing the remaining bearings

(e) purchasing and manufacturing some amounts other than those given above.

Suppose that management has decided to drop product B12. Independently of requirements 1 and 2, assume that Brighton Industries' idle capacity of 41 000 machine hours has a traceable, avoidable annual fixed cost of $88 000, which will be incurred only if some of the spare capacity is used. Calculate the maximum price Brighton Industries should pay a supplier for component B18.