Sneha Tulsyan

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Handout on relevant costing

Make or buy decision: The following exhibit contains the data for the Block Company for the years just ended. The company makes industrial power drills. Exhibit 1 shows the costs of the plastic housing separately from the costs of the electrical and mechanical components. Answer each of the following questions independently.

1. A supplier offered to manufacture the year’s supply of 100000 plastic housings for $13.00 each. What would be the effect on operating income if the Block Company purchased rather than made the plastic housing? Assume that Block Company would avoid $350000 of the fixed costs assigned to housing if it purchases the housings. Company has no alternative use for existing facilities.

2. Suppose that Block Company could purchase the housings for $13.50 each and use the vacated space for the manufacture of a deluxe version of its drills. Assume that it could make 20000 deluxe units (and sell them for $130 each in addition to the sales of the 100000 regular units at regular price) at a unit variable cost of 90, exclusive of cost of plastic housing and exclusive of the 10% commission on sales. The company could also purchase the 20000 extra plastic housing for $13.50 each. All fixed cost pertaining to plastic housing would continue because these costs relate primarily to the manufacturing facilities used. What would the operating income have been if Block Company had bought the housings (120000) and made and sold the deluxe units?

Exhibit 1
| |A |B |A+B | | |Electrical and mechanical Components(Excluding |Plastic Housing |Industrial Drills | | |the cost of plastic housing) | | | |Sales 1 lac units @ 100...
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