Problem 2 the Cost of Making Component Q Which Forms Part of Part

question 6

Essay

Problem 2
The cost of making component Q which forms part of product Y is stated as follows:
£
Raw material 4.00
Direct labour 8.00
Variable overhead 6.40
Fixed overhead 9.60
Total absorption cost per unit 28.00
Component Q could be brought from an outside supplier for 20.
b) You are required, assuming that fixed production costs will not change to state whether the company should continue making the component Q or buy it from outside. Explain the costs you use and your reasoning.

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Definitions:

FMV

Fair Market Value; the price an asset would sell for on the open market between a willing buyer and a willing seller.

Basis

The amount of investment in an asset for tax purposes, used to calculate gain or loss on the asset's sale.

Debt

Debt signifies an amount of money borrowed by one party from another, often with the agreement that it will be repaid, usually with interest, at a future date.

Schedule L

A form used by businesses filing their federal tax return to provide a balance sheet if they have more than $250,000 in receipts or assets.