For Several Years,Patel Division Has Produced an Electronic Component That

question 130

Essay

For several years,Patel Division has produced an electronic component that it sells to Morrison Division at the prevailing market price of $27.Patel manufactures the component only for Morrison Division and has previously made no sales of this product to outside customers.The product is available from independent suppliers who would charge the Morrison Division $27 per unit.Patel Division currently produces and sells 30,000 of these components each year and also manufactures several other products.The following annual cost information was compiled after the close of 2010 operations,during which time Patel Division operated at full capacity:
$\begin{array}{lr}& \text { Cost per } \\\text { Patel Division (2010) } &\text { Component }\\\text { Direct materials } & \$ 9.00 \\\text { Direct labor (hourly basis) } & 11.20 \\\text { Variable overhead } & 5.00 \\\text { General fixed overhead of plant } & 12.40 \\\text { Traceable fixed overhead }(\$ 90,000 \div 30,000) & 3.00 \\\text { Variable shipping expenses } & 1.00 \\\text { Total unit cost } & \$ 41.60 \\\end{array}$
General fixed overhead represents allocated joint fixed costs such as building depreciation,property taxes,and salaries of production executives.If production of the components were discontinued,$72,000 of the annual traceable fixed overhead could be eliminated.The costs to be saved currently require cash outlays; the balance of traceable fixed overhead is equipment depreciation on machinery that could be used elsewhere in the plant.
a. Compute the incremental cost per unit of this product manufactured by Patel Division.
b. The division manager contends that producing the components to accommodate other divisions is a sound policy as long as variable costs are recovered by sales. Should Patel Division continue to produce the components for Morrison Division?

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Definitions:

Reproduce

The biological process by which new individual organisms are generated, ensuring the continuation of a species.

Fox-Breeding Study

A series of experiments aimed at investigating the process and implications of domesticating wild foxes, focusing on behavioral and physiological changes over generations.

Wild Foxes

Wild foxes are small to medium-sized, omnivorous mammals belonging to several genera of the family Canidae. They are known for their bushy tails, pointed ears, and ability to adapt to a wide range of environments.

Domesticated

Describes animals or plants that have been selectively bred and adapted over generations to live alongside humans for agricultural, work, or companionship purposes.