Instead of making canopies for their trailers Ajay Metal Workers have the opport
ID: 2409150 • Letter: I
Question
Instead of making canopies for their trailers Ajay Metal Workers have the opportunity to purchase them in sufficient quantities at $100 per canopy. Currently Ajay Metal Workers makes the canopies for 300 trailers per year at the following costs:
Material $40 Direct Labour $30 Variable overhead $20 Fixed overhead $25
A saving of 20% of fixed overhead would occur if the components were bought in. Should the component be bought in, and why?
a) No, increased cost of $5 per canopy.
b) No, increased cost of $10 per canopy.
c) Yes, cost savings of $5 per canopy.
d) Yes, cost savings of $10 per canopy.
Explanation / Answer
Solution:
As there is increase in cost by $5 if component is bought in therefore, company should not buy canopies due to increased cost of $5 per canopy.
Hence option a is correct.
Per unit Analysis of Differential Cost - Ajay Metal Workers Particulars Make Canopy Buy Canopy Net Income Increase (Decrease) Costs: Direct material $40.00 $0.00 $40.00 Direct Labor $30.00 $0.00 $30.00 Variable overhead $20.00 $0.00 $20.00 Avodiable fixed overheaed $5.00 $0.00 Purchase price $0.00 $100.00 -$100.00 Total Cost $95.00 $100.00 -$5.00