mANAGEMNT ACCOUNTING QUESTION

Question 2 - Relevant Costing (10 marks) GadgetGuy Company produces two products: Games and Systems. Financial information for the two products is given below for one month: Games Systems Sales Revenue 150,000 80,000 Variable Costs 80,000 46,000 Fixed Costs 20,000 38,000 Profit 50,000 (4,000) Games uses a special component that is purchased from an external supplier for $25 per unit. Each month, 2,000 components are purchased. All units produced are sold and there are no ending inventories of special components. The company is considering making the special component rather than buying it. Unit variable manufacturing costs are as follows: Direct material 2 Direct labour Variable overheads 2 Required: a. Assuming that GadgetGuy has available capacity, should they make or buy the special component? Show supporting calculations. (5 marks) b. Assume Gadget Guy instead decides to make the special component and are currently operating at full capacity. They have two options to create needed capacity. Rent the required factory space and machinery at a cost of $27,000 per month. A supervisor will also need to be hired, costing $10,000 per month. a Drop the Systems product line. It would cost $2,000 to convert existing machinery to produce the special component