Homework answers / question archive / CBA is an air-purifier fan model manufactured by PureAir Limited

CBA is an air-purifier fan model manufactured by PureAir Limited

Accounting

Share With

---

CBA is an air-purifier fan model manufactured by PureAir Limited. The company expects to sell 15,000 units of CBA model in the coming year. The model requires a thermostat component which allows the fan to automatically work upon a pre-set temperature. PureAir has had an internal production division manufacturing the thermostat component in-house. However, the senior managers are considering outsourcing this component to an external supplier.

The purchase decision would eliminate all variable costs but some of the fixed costs. Allocated costs will have to be absorbed by other production departments.

Variable manufacturing costs to produce each thermostat component were:

Direct materials per unit:	$14
Direct labour per unit:	$10.80
Indirect labour per unit:	$1.49
Utilities per unit:	$1.35

 

Fixed manufacturing costs to produce each thermostat component were:

Cost item	Direct	Allocated
Depreciation	$4,950	$4,050
Property taxes	2,250	900
Insurance	4,275	2,025

 

Mechanica Limited has offered PureAir a quote to purchase a similar thermostat component with the following information:

1) The lowest quotation for 15,000 units of thermostat component is $411,600

2) freight and inspection costs would be $0.60 per unit;receiving costs of $4,200 per year would be incurred by PureAir.

3) If the thermostat components are purchased on an ongoing basis, one of PureAir’s manufacturing plants would be closed. The facilities would be rented out to produce a net income of $27,000 per year.

4) If the thermostat components are purchased on an ongoing basis, a machine operator from the plant will be transferred to the purchasing department (the employee’s salary is $60,000).