Strange Ltd manufactures 20,000 components per year. The manufacturing cost per unit of the components is as
Question:
Strange Ltd manufactures 20,000 components per year. The manufacturing cost per unit of the components is as follows: Direct materials $10 Direct labor 14 Variable overheads 6 Fixed overheads 8 Total unit cost $38 Assume that the fixed overheads reflect the cost of Stranger's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Strange for $32.
A. What is the effect on income if Strange purchases the component from the outside supplier?
B. Independent of your answer to A, assume that Strange can avoid $50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Strange purchases the component from the outside supplier?
C. Identify and explain three qualitative factors that are relevant to this decision.
Expert Answer:
A Effect on Income if Strange Purchases from the Outside Supplier To calculate the effect on income we need to compare the total cost of manufacturing ... View the full answer
