-Refer to the Figure The Metallic Ink Requires 300 Purchase Orders Per Year and Direct

question 23

Essay

$\begin{array}{lr}\text { Direct materials } & \$ 0.40 \\\text { Direct labour } & 0.15 \\\text { Variable overhead } & 0.06 \\\text { Fixed overhead* } & 0.50\end{array}$
-Refer to the Figure.Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier,Joseph Michaels,the production supervisor,said,"That's nuts! This ink is a real pain to make,and $1.24 per millilitre sounds like a bargain to me!" Based on Jim's feelings,Dominique Rudder (a new CPA in the accounting office)did an ABC analysis of ink production.She came up with the same direct materials,direct labour,and variable overhead,as well as the following information on activities required by metallic ink production: $\begin{array}{ll}\text { Setups } & \$ 60,000600 \text { setups per year } \\\text { Purchasing } & \$ 270,0009,000 \text { purchase orders per year }\end{array}$ The metallic ink requires 300 purchase orders per year and 80 setups. A. If Rudder purchases the ink from the outside supplier, would operating income be higher or lower, and by how much?
B. What is the highest price per millilitre that Rudder would pay an outside company for the ink?

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