The South Company makes two products M1 and M2 with the budgeted details as follows:

M1 (in ) M2 (in )

Production and sales for the year 10,000 12,500

Selling price 10.00 8.00

Cost per unit:

Direct materials 2.50 3.00

Direct labour 1.50 1.00

Variable production overhead 0.60 0.40

Fixed production overhead 1.20 1.00

Profit per unit 4.20 2.60

The fixed production overhead shown above comprises both general and specific fixed overhead costs.

The general fixed overheads cost has been attributed to units of M1 and M2 on the basis of direct

labour cost. The specific fixed cost totals 2,500 per year and relates to product M2 only.

Both products are available from an external supplier.

Explain clearly your answers and show your detailed calculations.

1) If the South Company decided to purchase only M1, what should be the maximum price to be paid per unit of M1 instead of internal manufacture?

2) If the South Company decided to purchase only M2, what should be the maximum price to be paid per unit of M2 instead of internal manufacture?

3) If only product M1 was to be outsourced, what should be the number of units to be sold to achieve a profit of 50,000 per year?

Answer rating: 100% (QA)

To solve this problem we need to calculate the relevant costs and determine the maximum prices for outsourcing each product Given information M1 produ... View the full answer