The management of Johnson plc is considering next year’s production and purchase budgets. One of the components produced by the company, which is incorporated into another product before being sold, has a budgeted manufacturing cost as follows: (£)

(£) Direct material = 14

Direct labour (4 hours at £3 per hour) = 12

Variable overhead (4 hours at £2 per hour) = 8

Fixed overhead (4 hours at £5 per hour) = 20

Total cost = 54 units

Trigger plc has offered to supply the above component at a guaranteed price of £50 per unit. Required:

a. On a cost basis only, advise Springer whether they should purchase from Trigger or not.

b. Explain how your advice would be affected by each of the two separate situations below:

(i) As a result of government legislation if Springer continues to manufacture the component the company will incur additional inspection and testing expenses of £56,000 per annum, which are not included in the above-budgeted manufacturing costs.