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Question: Workshop: Springer (make or buy decisions, irrelevance of past costs) - The management of Springer is considering next year’s production and purchase budgets. 

22 Oct 2022,1:02 AM

 

Workshop 4

Workshop: Springer (make or buy decisions, irrelevance of past costs)

The management of Springer is considering next year’s production and purchase budgets.  One of the components produced by the company, which is incorporated into another product before being sold, has a budgeted manufacturing cost per unit as follows:

Component X €  
Materials   14  

Labour

(2 hours at €6 per hour)

   12  

Variable overhead costs

(2 hours at €4 per hour)

     8  
Fixed costs   20  
Total cost €54 (per unit)

 

The budget is based on an output of 3,000 units.

The fixed costs have been calculated in accordance with company policy and are, essentially, arbitrary allocations.  Further investigation leads you to discover that these costs are unavoidable even if production of the component ceases.  Trigger, another company, has offered to supply Component X at a guaranteed price of €50 per unit.

Required

In your capacity as management accountant, write an email to the Production Director, which explains and discusses each of the following areas:

 

(a)

Considering only the costs outlined above, should the component be purchased from Trigger or manufactured in house?

 

  
(b)

In future, the company will incur additional annual safety inspection costs of €56,000 related to making the component, how would this affect the decision, if

(i)      annual production is 2,000 units

(ii)     annual production of 3,500 units

(iii)   annual production is 4,000 units?

 

  
(c)

The Production Director of Springer recently said, “We must continue to manufacture the component as only a year ago we purchased some special grinding equipment to be used exclusively for this component.  The equipment cost €100,000, it cannot be resold or used elsewhere and if we cease production of this component we will have to write off the written down book value which is €80,000.”

 

  
(d)
The other factors that should be taken into account before making the final decision to outsource or not.
 

 

Expert answer

 

Component X €  
Materials   14  

Labour

(2 hours at €6 per hour)

   12  

Variable overhead costs

(2 hours at €4 per hour)

     8  
Fixed costs   20  
Total cost €54 (per unit)

  

Component X €  
Materials   14  

Labour

(2 hours at €6 per hour)

   12  

Variable overhead costs

(2 hours at €4 per hour)

     8  
Fixed costs   20  
Total cost €54

(per unit)
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