Machining Specialists Co. (MSC) produces bearings among other product lines. The final process of manufacturing these bearings involves assembling several component parts together. Currently, MSC manufactures all these component parts except for part J12.
Additional information on part J12
MSC had manufactured part J12 five years ago. Even though it no longer produces this part internally, it still has the equipment necessary for manufacturing this part.
The manager, Greg, is considering making this part again instead of buying it from an external supplier. The supplier charges $8 per unit of part J12. MSC usually purchases 90,000 units of part J12 per annum, and proposes to continue to do so in the future.
If part J12 were to be produced in-house, it would be manufactured in batches: each batch has a slightly different circumference (to fit into large, medium and small sized bearings). Therefore, 3 sizes of part J12 would have to be manufactured, i.e. large, medium and small: each size consumes the same amount of manufacturing resources. The equipment will have to be set-up each time the machinery was used to produce a different batch. The company has sufficient machining (hours) capacity to manufacture part J12 in-house.
Details of cost of manufacturing part J12:
- Prime costs for each unit of part J12 are $4.50.
- The company has enough equipment to set up 3 additional production lines to produce component parts for its bearings with the available equipment: hypothetically, each line could produce 85,000 units of part J12. A supervisor would have to be hired for each production line, at a salary of $40,000/supervisor.
- Machining expenses (excluding supervisor/s salary in (ii) above) would amount to $1.50 per machine hour.
- The cost accountant has carried out a detailed analysis of other overhead costs. He explains that there are 2 types of “other overhead costs”: fixed costs and variable costs. He adds that the fixed costs are not permanently fixed because he purchases bundles of these fixed overhead costs as and when the factory requires these overhead services. He provides a breakdown of these overhead costs and related information in the table below.
If part J12 were to be manufactured in-house, the firm will not purchase this part
from its external supplier. Therefore, purchase orders will decrease by 8,000 (which
are associated with buying Part J12 from the external supplier). Similarly, moves in
handling stock of part J12 freighted-in will decrease by 400. Inspection hours freed
up from having to inspect stock of part J12 freighted in from the supplier, will be used
to inspect raw material used to produce part J12.
1.1.) Leaving aside qualitative considerations, should Company MSC make or buy
part J12 (based on quantitative analysis alone)? Show all relevant calculations. You
must explain (in words) your numerical calculations and any assumptions you have
made in your calculations.
1.2) Would your analysis in (1.1) be different, if MSC did not have the capacity of
machining hours to manufacture part J12? Explain in full in words – DO NOT carry out
(Total for Q1: 18 marks)
ABC Company produces one product that passes through 4 sequential departments. Each department has a manager that oversees the operations within that department.
The Accountant wants to evaluate the performance of each department by producing department based Profit and Loss statements. Each manager will be held responsible for the profit or loss of their department.
Would you recommend that the accountant prepare profit and loss statements based on absorption or variable costing?
Justify your answer by critically evaluating the strengths and weaknesses of your chosen method. (Written responses for Q2 must be presented using appropriate sentence and
paragraph structure and min.220 words)
(Q2: 6 marks)
(Total marks: 24)
- All assessments must be typed.
- Show all workings for your calculations. In Q1 marks are awarded for workings and explanations.
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