Bendix Ltd is considering the alternatives of either purchasing component VX-1 from an outside supplier or producing the component itself. Production costs to Bendix are estimated at:
|
Production labour |
$200 |
|
Raw materials |
600 |
|
Variable overheads |
100 |
|
Fixed overheads |
300 |
|
Total |
$1,200 |
An outside supplier, Cosmo Ltd, has quoted a price of $1,000 for each VX-1 for an order of 100 of these components. However, if Bendix accepts the quote from Cosmo, the company will need to give three months’ notice of redundancy to staff.
- Calculate the relevant costs of the alternative choices (show your workings) and make a recommendation to management as to which choice to accept.
- How would your recommendation differ if Bendix employees were on temporary contracts with no notice period?
- Explain the significance of a stock valuation of $1,300 for the VX-1 at the end of the last accounting period.