Oscar Ltd manufactures small electrical parts in Hamburg, Germany. The company has a production capacity of 18,000 electrical units per year and the unit cost is as follows:

The company’s accountant has established that 40% of the overhead is fixed. One of the company’s major competitors—Calwson Electrical has been struggling to breakeven and has offered to sell 18,000 electrical units to Oscar Ltd for €50 per unit. If Oscar Ltd accepts the offer, some parts of its factory presently used in the production of the electrical units could be leased out to a warehouse firm at an annual rent of €50,000. Oscar Ltd will also reduce its manufacturing overheads by €5 per unit of electrical unit produced.

Required

1. Would you advise Oscar Ltd to make or buy the electrical units?
2. What would be the maximum purchase price acceptable to Oscar Ltd?
3. Discuss some of the factors to be considered by Oscar Ltd before accepting the offer to buy from Calwson Electrical.

Transcribed Image Text:

Direct materials Direct labor Total manufacturing Total manufacturing cost overheads € 10 12 25 47