The Management of James Industries Has Been Evaluating Whether the Company

question 86

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:
$$\begin{array} { l r } \text { Direct materials } & 15 \\\text { Direct labour } & 40 \\\text { Variable manufacturing rverhead } & 10 \\\text { Fixed manufacturing cverhead } & 35 \\\text { Total } &\$100\end{array}$$ James Industries uses 4,000 components per year.After Light,Inc.,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,Inc.,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 dollar difference in favour of that alternative.
c.Assume the company could eliminate production supervisors with salaries totalling $30,000 if the component is purchased from an outside supplier.Indicate if the company should make or buy the component and the total dollar difference in favour of that alternative.

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Definitions:

Expense Warranty Accrual Method

An accounting method where expected future warranty claim costs are estimated and recorded as an expense at the time of sale.

Liability For Warranties

The responsibility of a company to cover costs of addressing defects or repairs under warranty for sold products.

Income After Bonus

The portion of a company's income that remains after paying out bonuses to employees. This figure helps assess the company's net profitability after distributing employee incentives.

Tax Rate

The percentage at which an individual or corporation is taxed, which can vary depending on income level, type of income, or jurisdiction.