QUESTION 4

Make or Buy a Component

Weldon Ltd. currently manufactures Widget1 which is used in many of its products. It is currently producing 35,000 units of Widget1. The cost per unit to manufacture is currently as detailed below:

					Per unit
Direct materials					$ 6.00
Direct labour					2.00
Variable overhead					1.50
Fixed overhead					3.00
Total cost per unit					12.50

Of the total fixed overhead applied to Widget1, $77,000 relates to salaries of supervisory personnel who would be terminated if the company decides to outsource this product. The remaining fixed overhead is allocated based on square footage utilized.

An outside supplier, James Inc., has contacted the company and has agreed to supply the Widget 1 part at $11 per unit. They are prepared to sign a long-term contract at $12 per unit.

REQUIRED:

1. Should Weldon accept this offer to purchase this part at $12 assuming that there is no other use for the factory space? Calculate the total effect on income if it accepts this offer.

2. Would your answer change if Weldon could rent the plant space currently used to produce Widget1 for $35,000 per year? Explain and show calculations.