2.Maximum buy price.
Mosby’s break even point (the point at which buying costs = production cost) would be $16.70 per unit.
$580,000 annual production costs + Direct fixed overhead of $88,000
Cost per unit …show more content…
3. Income change in buy decision
Based on current annual production of 40,000 units, Mosby’s income from RB911 would increase by $28,000 per annum by buying the part rather than producing it.
4. Make or buy part RB911.
In scenario two, all fixed overhead is now irrelevant to the decision as fixed costs are identical in each alternative.. The comparison in Table 4 demonstrates that the irrelevance of all the fixed overhead, increases the cost of buying and shows producing RB911 provides significant savings.
5. Maximum buy price
In scenario two, the most that Mosby would be willing to pay a supplier for RB911 is $14.50 per unit.
Relevant annual production costs = $580,000
Break even cost per unit $580,000/40,000 = $14.50
Therefore, buying at $14.50 would the maximum Mosby would pay.
6. Income change in buy …show more content…
It is common practice to allocate overhead costs by using direct labour hours, as the cost driver as W. White’s Chemicals have but, it is now a small portion of overheads in modern companies (Cooper & Kaplan 1988, p.96). It can be seen from the results that incorrectly allocated costs can result losses and create a false impressions of market conditions, where V-312 is overpriced and T-315 is severely under-priced. Additionally, Mosby Design and Manufacturing incremental costs determination must be accurate to assist management with critical make or buy