Question 1 Relevant Costs

A manufacturer has been purchasing components for $350 a unit as an input to its manufacturing process. The factory currently operates at 80% of capacity. The company has skilled labour and a training budget to update skills of workers. The company operates in a city where skilled labour is tough to find. The cost per unit to make these components at the factory is estimated as follows:

Direct materials$ 100

Direct labour 175

Variable factory overhead 50

Depreciation on factory equipment 25

Other fixed factory overhead 50

Total estimated cost per unit$ 400

Purchases have been 10,000 units

Total budget estimate$4,000,000

Questions:

1. What type of specific analysis is the above example? (1 mark)

2. Use quantitative analysis to assess whether the company should change from purchasing the components. (8 marks)

3. What is an important strategic consideration in making the above decision?