The Management of James Industries Has Been Evaluating Whether the Company

question 34

Essay

The management of James Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A £200 cost per component was determined as follows: $\begin{array}{lr}\text { Direct materials } & £ 15 \\\text { Direct labour } & 40 \\\text { Variable manufacturing overhead } & 10 \\\text { Fixed manufacturing overhead } & 35 \\\text { Total } & £ 100\end{array}$
James Industries uses 4,000 components per year. After Light, SA., submitted a bid of £80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Light, SA., James's unused production facilities could be leased to another company for £50,000 per year.
a.Determine the maximum amount per unit James should pay an outside supplier.
b.Indicate if the company should make or buy the component and the total monetary difference in favor of that alternative.
c.Assume the company could eliminate production supervisors with salaries totaling £30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total monetary difference in favor of that alternative.