From the information provided in this case study, we adopt relevant costing principles to determine the optimal decision of either producing the Global Positioning System Navigator or purchase them on a contract basis from Far East Enterprises Ltd.
1.1 Workings
Note 1 – Supervisory Cost
Supervisory Cost as per total manufacturing cost calculated $7.00 per unit
Relevant Costs [($4,200 x 10) / 8,000] $5.25 per unit
Committed Cost $1.75 per unit
Note 2 – floor space Charges
Floor space charges as per total manufacturing cost calculated $5.00 per unit
Relevant Costs ($5 / 2) $2.50 per unit
Committed Cost $2.50 per unit
I assume that the factory costs will diminish by not operating half of the factory floor space and thus ½ of the floor space charges will be considered as a relevant cost.
The relevant costs of buying from Far East Enterprising Ltd. are lower than those of manufacturing the product by $15.58 per unit. Therefore the management of Behemoth Motors Corporation should purchase it and not produce it, because it is financially more feasible in light that product quality and delivery reliability are the same.
The Essay on Eprecision Manufacturing Company
In a recent staff meeting, John Winkleman, president of ePrecision Manufacturing Company, addressed his managers with this problem: Intense competitive pressure is beginning to erode our market share in handhelds. I have documented 11 large orders that have been lost to Beckman and Wiston within the past three months. On an annual basis this amounts to nearly 10,000 units and $1.5 million in lost ...
References
ACCA Study Text (1999). Information for Control and Decision Making. Seventh Edition. London: BPP Publishing Limited.
Drury C. (1996). Management and Cost Accounting. Fourth Edition. London: International Thomson Business Press.
