Mimo Ltd manufactures a variety of electric toothbrushes. An outside supplier ha
ID: 2555105 • Letter: M
Question
Mimo Ltd manufactures a variety of electric toothbrushes. An outside supplier has offered produce and sell one type of electric toothbrushes to Mimo Ltd for a cost of £70 per unit. T evaluate this offer, Mimo Engineers has gathered the following information relating to its ow cost of producing the electric toothbrushes internally Per unit Direct material Direct labour Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 15,000 units per yea 420,000 300,000 90,000 180,000 270,000 1,260,000 28 20 12 18 84 One third supervisory salaries, 2/3 depreciation of special equipments (no sales value), (1/3 traceable supervisor salaries) a. Assuming that the company has no alternative use for the facilities that are now being used to produce the electric toothbrushes, should the outside (12 mark supplier's offer be accepted? Show all computations. b. If the electric toothbrushes were purchased, Mimo Ltd, could use the freed capacity to launch a new product. The segment margin of the new produd would be E150,000 per year. Should Mimo Ltd accept the offer to buy the electric toothbrushes for £70 per unit? Show all computations. (8 marksExplanation / Answer
1 Per unit Total 15000 units Make Buy Make Buy Direct materials 28 420000 Direct labor 20 300000 Variable manufacturing overhead 6 90000 Avoidable Fixed manufacturing overhead traceable 4 60000 Purchase cost 70 1050000 Total relevant cost 870000 1050000 The outside supplier's offer should not be accepted as cost to buy is more than cost to make. 2 Make Buy Total cost(as above) 870000 1050000 Opportunity cost 150000 Total relevant cost 1020000 1050000 The outside supplier's offer should not be accepted as cost to buy is more than cost to make.