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Part A:
Armidale Manufacturing produces Part XM for its main product, XMT Hardware. The company’s 2016 books reveal the following per unit cost of Part XM:
Direct materials $ 21
Direct labor $30
Variable overhead $25
Fixed overhead $28
Total $104.00
Tamworth Manufacturing has offered Armidale Manufacturing to sell them 7,000 of the Part XM for $89.00 each. Armidale Manufacturing, if agrees to the offer, will be able to avoid/eliminate $140,000 of fixed overhead costs.
Required:
1. How much are the total relevant costs for Armidale Manufacturing?
2. If you are a management accountant at Armidale Manufacturing, would you decide to buy Part XM of Tamworth Manufacturing or continue to manufacture the part in-house? Work out the difference in financial value between the two alternatives?
Part B:
What ‘qualitative factors’ (write any two) you should consider before making the decision under Part A.
Expert Answer
| 1 | ||||||||||||||||||
| Relevant costs: | Per unit | 7000 units | ||||||||||||||||
| Direct materials | 21 | 147000 | ||||||||||||||||
| Direct labor | 30 | 210000 | ||||||||||||||||
| Variable overhead | 25 | 175000 | ||||||||||||||||
| Fixed overhead | 140000 | |||||||||||||||||
| Total | 672000 | |||||||||||||||||
| 2 | ||||||||||||||||||
| Make | Buy | |||||||||||||||||
| Total costs | 672000 | 623000 | ||||||||||||||||
| Difference | 49000 | |||||||||||||||||
| Armidale Manufacturing should buy Part XM of Tamworth Manufacturing as it would result in cost savings of $49000 | ||||||||||||||||||
| The two qualitative factors are: | ||||||||||||||||||
| Quality: The management should be cautious to avoid sacrificing the long-term benefit of being associated with quality products and services for the short-term quantitative benefit of cutting costs | ||||||||||||||||||
| Timely supplies: The management should ensure that timely supplies of materials are provided | ||||||||||||||||||
