MNC Company assembles bicycles

Subject:AccountingPrice: Bought3

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MNC Company assembles bicycles. This year's expected production is 10,000 units. MNC makes the Chains for Its bicycles. Its Accountant reports the following costs for making 10,000 Bicycle Chains

 

Particulars	Cost per unit ($)	Total for 10,000 Units
Direct Material	4.00	40,000
Direct Manufacturing Labour	2.00	20,000
Power and Utilities (variable)	1.50	15,000
Inspection, Set-Up and Materials Handling		2,000
Machine Rent		3,000
Allocated Fixed Costs		30,000

 

MNC received an offer from an outside vendor for the supply of any number of chains at $.8.20 per Chain. The following additional information is available on MNC's operations: 

• Inspection, Set-up and Materials Handling Costs vary with the number of batches in which the Chains are produced. MNC currently produces the Chains in batches of 1000 units. It estimates that 10 batches are required to meet the expected production requirements. 

• MNC rents the machine used to make the Chains. If it chooses to outsource the Chains, machine rent can be avoided. 

 

Required: 

1.  Should MNC accept the Vendor's offer for 10,000 units? What is the net gain/ (loss)? 

 

1. Suppose the Chains were purchased from outside, the facilities where the Chains are currently made will be used to upgrade the bicycles by adding Mud Flaps and Reflectors. As a result, the Selling Price of the Bicycles can be increased marginally by $20. The Variable Costs of the upgrade would be $18 and additional Tooling Costs of $16,000 would be incurred. Should MNC make or buy the Chains, at the anticipated production level of 10,000 units? What is the maximum price payable to the Vendor in this situation?