Refer to Rudder Company

question 48

Essay

Refer to Rudder Company. 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:
Setups $ 60,000 600 setups per year
Purchasing $270,000 9,000 purchase orders per year
The metallic ink requires 300 purchase orders per year and 80 setups.
Required:
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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Definitions:

Dopamine

A neurotransmitter involved in many functions, including mood regulation, reward-motivated behavior, and control of movement.

Norepinephrine

A neurotransmitter and hormone involved in the body's fight or flight response, regulating heart rate, blood pressure, and blood sugar among other physiological functions.

Stimulant

A substance that increases physiological or nervous activity in the body, often enhancing alertness and energy.

GABA

A neurotransmitter in the brain that inhibits many of the activities of the central nervous system, thus playing a key role in reducing anxiety and stress.