Description
Mosby Design and Manufacturing is currently manufacturing part RB911, producing 40,000 units annually. The part is used in the production of several products made by Mosby. The cost per unit for RB911 is as follows:
Direct materials | $ 9.00 |
Direct labour | $ 3.00 |
Variable overhead | $ 2.50 |
Fixed overhead | $ 4.00 |
| $18.50 |
Of the total fixed overhead assigned to RB911, $88,000 is direct fixed overhead (the lease of production machinery and salary of a production line supervisor—neither of which will be needed if the line is dropped). The remaining fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Mosby for $16. There is no alternative use for the facilities currently used to produce the part.
Required:
1. Should Mosby make or buy part RB911? Justify your answer.
2. What is the most Mosby would be willing to pay an outside supplier?
3. If Mosby bought the part, by how much would income increase or decrease?
Now suppose that all of the fixed overhead is common fixed overhead.
4. Should Mosby make or buy part RB911? Justify why/why not.
5. What is the most Mosby would be willing to pay an outside supplier?
6. If Mosby bought the part, by how much would income increase or decrease?
Explanation & Answer
See the attached solution below. In case you need further clarification you can always get back at me. Regards,Frank
1
Student’s name
Professor name
Course
Date
Management Accounting-Costing decisions.
Question 1: Should Mosby make or buy part RB911? Justify your answer.
We need to compare the per unit cost of making verses the cost of buying one unit from a
supplier. An outside supplier will supply the part at $16 per unit. The cost of making one part can
be calculated as follows:
Direct materials $ 9.00
Direct labour
$ 3.00
Variable overhead $ 2.50
Fixed overhead $ 2.20
$16.70
Of the fixed overhead, $88,000 is th...
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