Question 3 (15 marks)

Quantum Manufacturing produces measuring instrument of 8 units using component J7 each month. The total manufacturing cost of one unit of J7 is $2,220 which include the following costs - Direct material: $200; Material handling (10% of direct material cost): $20; Direct labour: $800 and Manufacturing overhead (150% of direct labour): $1,200.

Material handling represents the direct variable costs charged by the Receiving Department. It has been agreed that they are applied to direct material and any purchased component at 10 per cent of the cost of the direct material or component delivered. This is a separate charge in addition to manufacturing overhead.

Quantums annual manufacturing overhead budget is one-third variable and two-thirds fixed. Hardware Supply, one of Quantums reliable vendors, has offered to supply component J7 at a unit price of $1,800.

Required:

1. a) Calculate the incremental cost of purchasing one unit of component J7 from Hardware Supply and the incremental unit cost of manufacturing in-house. Illustrate by what amount would the unit cost of J7 change between the two choices?

   (10 marks)

2. b) Assume if Quantum purchases J7 from Hardware Supply, the capacity that Quantum used to manufacture these components would be able to rent out for $12,000 per month. Assess by how much would Quantums monthly cost for J7 increase or decrease if Quantum decides to purchase the 8 units from Hardware Supply?

   (3 marks)

3. c) Assume that Quantum does not wish to commit to a rental agreement but could use its idle capacity to manufacture another product that would contribute $17,000 per month. Assess Quantums opportunity cost from using the space to manufacture J7 if Quantum elects to manufacture J7 in order to maintain quality control?

   (2 marks)