Ahrends Company Makes 70,000 Units Per Year of a Part $\quad$

question 68

Multiple Choice

Ahrends Company makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:Direct materials. $\quad$$\quad$ £17.80
Direct labour. $\quad$$\quad$ 19.00
Variable manufacturing overhead. $\quad$$\quad$ 1.00
Fixed manutacturing ov erhead. $\quad$$\quad$ 17.10
Unit product cost. $\quad$$\quad$ £54.90
An outside supplier has offered to sell the company all of these parts it needs for £48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be £273,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.
-How much of the unit product cost of £54.90 is relevant in the decision of whether to make or buy the part?

• A)£37.80
• B)£46.70
• C)£54.90
• D)£19.00

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Definitions:

Ledger Accounts

Individual accounts within the general ledger, detailing transactions related to a specific asset, liability, equity, revenue, or expense.

Financial Statements

Reports that provide an overview of a company’s financial condition, including balance sheet, income statement, and cash flow statement.

Bank Loan Payable

This term represents the amount owed by an individual or an entity to a bank as a result of borrowing funds, typically subject to specified repayment terms and interest.

Interest Accrued

Interest that has been incurred but not yet paid, often recognized in financial statements through adjusting entries.