Question

Bancroft currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $122. Bancroft currently produces 20,800 subcomponents at the following manufacturing costs: Per unit Direct materials Direct labor 30 Variable manufacturing overhead 37 Fixed manufacturing overhead Unit cost 5132 a. If Bancroft has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier? Less Prol HE b. Bancroft has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier? Маті Pice 1 of 8 il Next > ere to search o e 0 C G B $ 3 5 7 8 IQ W E R.

Answer 1

Requirement a

Given, in the question there is no alternative use for manufacturing capacity. So Fixed costs will still be incurred, with no benefit. Variable cost will not incurred.

Fixed cost = $23 x 20,800 unit = $478,400

Cost of purchase from outside = $122 x 20,800 unit = $2,537,600

New total cost = $478,400 + $2,537,600 = $3,016,000

Old total cost = $132 x 20,800 units = $2,745,600

So profit will reduce by = $3,016,000 - $2,745,600 = $270,400

Requirement b

Given, in the question there is no alternative use for manufacturing capacity. So Fixed costs will still be incurred, with no benefit. Variable cost will not incurred. So they will be willing to pay maximum of variable cost incurred per unit.

Maximum price = $132 - $23 = $109 per unit

Requirement c

New Fixed cost = ($23 x 20,800 unit) - $322,000 = $156,400

Cost of purchase from outside = $122 x 20,800 unit = $2,537,600

New total cost = $156,400 + $2,537,600 = $2,694,000

Old total cost = $132 x 20,800 units = $2,745,600

So profit will increase by = $2,745,600 - $2,694,000 = $51,600