Q2 A company by the name of ZZZ Ltd makes a product called E-44. The company is trying to figure out whether to continue manufacturing or buy it from outside. The following information was collected from the accounting records and production data for the year ending December 31, 2017. (10 Marks)

1. 20,000 units of E-44 were produced in the Machining Department.

2. Variable manufacturing costs applicable to the production of each E-44 unit were: direct materials $6.00, direct labour $7.00, indirect labour $1.40, utilities $1.05.

3. Fixed manufacturing costs applicable to the production of E-44 were:

All variable manufacturing and direct fixed costs will be eliminated if E-44 is purchased. Allocated costs will have to be absorbed by other production departments. 4. The lowest quotation for 20,000 E-44 units from a supplier is $307,000.

5. If E-44 units are purchased, freight and inspection costs would be $0.50 per unit, and receiving costs totalling $3,000 per year would be incurred by the Machining Department.

Requirements

(a) Make a recommendation as to whether E-44 should be manufactured or purchased. Justify your answer with appropriate calculations. (7 marks)

(b) Would your decision be different if Olympic Company has the opportunity to produce $6,000 of net income with the facilities currently being used to manufacture E-44? Justify your answer with appropriate calculations. (3 marks)

Cost Item Depreciation Property taxes Insurance Direct $7,000 800 1,400 $9,200 Allocated $3,000 420 600 $4,020