2011 costs:
- direct material cost per item $180
- direct manufacturing labor per item $50
- variable manufacturing costs per batch $1600
- Fixed manufacturing costs that can be avoided if item not made $320,000
- fixed manufacturing costs that can't be avoided whether or not item is made $800,000
Expected 2012 Costs:
- Direct cost per item $170
- direct manufacturing labor per item $45
- variable manufacturing costs per batch $1500
- Fixed manufacturing costs that can be avoided if item not made $320,000
- fixed manufacturing costs that can't be avoided whether or not item is made $800,000
8000 items manufactured in 2011 (40 batches of 200)
10,000 items expected to be manufacture in 2012 (80 batches of 125)
X Pty Ltd and approached offering to supply the items in 2012 at $300 per item on whatever delivery schedule Z Pty Ltd wants.
1) Caculate total expected manufacturing cost per item in 2012
2) On financial basis alone, should Z Pty Ltd choose to purchase items from X Pty Ltd or continue to manufacture them (capacity used to make items will become idle)
3) If Z pty Ltd chooses to buy from X Pty Ltd, they will then thoose to manufacture and sell special items instead.
- Estimated incremental future revenues from special items $2,000,000
- Estimated incremental cost to make and sell special items $2,150,000
- Should the continue to make items, or choose to purchase them from X Pty Ltd?