As part of the production process, Matheson produces a component used in the device they sell. This

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Question:

As part of the production process, Matheson produces a component used in the device they sell. This component represents 4% of the variable cost per unit that Matheson sells. One of these components is used in each of the units they sell. The Accounting Department reports these additional costs associated with the production of 15,000 components internally each year. The stores coordinator works only with this particular component and would not be needed if Matheson did not produce these components. The special equipment can also be sold for its book value if Matheson does not produce the component.

	Per component	15,000 components
Supervisor’s salary (fixed)	0.30	$4,500
Depreciation of special equipment (fixed)	0.20	$3,000
Allocated general overhead (fixed)	.50	$ 7,500

An outside supplier typically sells this component for $1.80 apiece. They are offering to sell Matheson the component for $1.65 a component if they will buy more than 20,000 per year. Otherwise, they would have to pay $1.80 per component.

a. What is the variable cost per unit for Matheson to produce the component?

Variable cost per unit = 0.70

b. How many units will Matheson need each year? Remember to include the “special order” from 11 if appropriate.

c. How much would Matheson pay the supplier for these components each year?

d. How much cost can Matheson avoid if they buy these components each year? Remember how to treat fixed costs when the quantity of units sold/produced is changed. (Chapter 1 & 6)

e. Should Matheson make these components or buy them from the supplier? Explain in 10 to 30 words.