Precision Bearings Inc. makes two bearings, B100 and B200, for use in its own production. Data regarding these two bearings follow: B100B200Machine hours required per unit2.53.0Cost per unit: Direct material$2.25$3.75Direct labor$4.00$4.50Manufacturing overhead Variable$2.00$2.25Fixed$3.75$4.50Total$12.00$15.00Precision’s annual demand for B100 and B200 are 8,000 units and 11,000 units, respectively. The company has only 41,000 machine hours to devote to the production of these bearings. This capacity would be idle if not used for these two bearings. An outside company has offered to sell Precision its annual supply of the two bearings at prices of $11.25 for B100 and $13.50 for B200.Answer the following questions:What should be Precision’s outsourcing decision? That is, how many units of each bearing should Precision outsource and/or produce in house? What would be the net savings/cost relative to completely outsourcing the two bearings? Answer this question independent of the first question, above. Suppose Precision wants to drop B100. Assume that 41,000 available machine hours have a traceable, avoidable fixed cost of $44,000, which would be incurred if any amount of this available capacity of 41,000 hours is used. (This is the fixed cost of jigs, dies and other items required to make B200 internally.) What is the maximum price Precision should agree to pay the supplier for B200?Note: This exercise will be discussed in detail in the next video. Just read the problem and move on to the next video (just say "moving on")The key point here is that machine time is the scarce resource. Therefore, compare the cost per hour of making each bearing. Note that fixed manufacturing overhead is not relevant as we incur this cost regardless of the chosen product mix.

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To analyze Precision Bearings Incs outsourcing decision and determine the maximum price it should be willing to pay for B200 if it decides to drop B100 we will break down the problem into the specific ... View the full answer