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Question 3 (30 marks) Bayswater Ltd makes Christmas themed decorations. The company sells a medium size plastic Christmas tree, complete with baubles, trinkets and fairy
Question 3 (30 marks) Bayswater Ltd makes Christmas themed decorations. The company sells a medium size plastic Christmas tree, complete with baubles, trinkets and fairy lights for $300. It currently makes and sells 3,000 sets of those every year. Production costs include $80 for materials and $60 for labour per set of decorations. It is the company's practice to allocate overheads to the product that consist wholly of fixed costs. Each set of decoration is allocated $50 of production overheads. OnWing Lid (a big department store chain) has approached Bayswater Lid and has offered to buy 1,000 sets of decorations from Bayswater Lid per year for two consecutive years at a price of $170 per set. The company does have the necessary production capacity to take on this order from OnWing Lid, and the company is expecting no other comparable orders or any alternative use of its production facilities. Required: a) Determine the relevant costs that should be taken account of in deciding whether to accept the order from On Wing Ltd or not. (3 marks) b) Should the company accept the special order from On Wing Ltd? (3 marks) c) In deciding whether to accept the special order or not, what non-financial factors should Bayswater Ltd consider? (6 marks) At present, Bayswater Lid buys tiny casings from an outside vendor and uses them to make the fairy lights. The company would like to know if making the casings in the company (instead of buying from outside for $18 per casing) would save the company some money. A preliminary analysis suggests that if they were to be made by Bayswater Lid itself, the material costs would be $5 per set, and labour cost would be $7 per set. More importantly, the company would need to buy a moulding machine specially to make the casings and that would add $14,000 to the annual fixed costs. Required: d) In determining whether the company should make the casings in-house or not, identify the costs that are relevant to such an analysis. (4 marks) e) Determine if there are any savings from making the casings in the company rather than buying them from outside. (7 marks)f) Discuss the non-financial factors that the company should consider in deciding whether to make the component in-house or buy from outside
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