Heavy Industrial Machines Limited uses ten units of Part No. T305 each month to produce large diesel engines. The costs to manufacture one unit of Part No. T305 are given below:
Direct material Rs. 20,000
Material handling (20% of direct material) Rs. 4,000
Direct labour Rs. 1,60,000
Manufacturing overhead (150% of direct labour) Rs. 2,40,000
Material handling, which is not included in the manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. The Company’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Workman Hydraulic Company, Australia, one of the Company’s reliable vendors, has offered to supply Part No. T305 at a unit price of Rs. 3,00,000. Material handling cost @ 20% of the purchase price will be incurred, as usual, if the part is purchased from Workman Hydraulic Company. Heavy Industrial Machines Limited is able to rent all idle capacity for Rs. 5,00,000 per month. If the Company decides to purchase the 10 units of Part No. T305 from Workman Hydraulic Company, what will be the effect on its profitability? Support your answer with the necessary calculations.
Answers
Explanation:
manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. The Company’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Workman Hydraulic Company, Australia, one of the Company’s reliable vendors, has offered to supply Part No. T305 at a unit price of Rs. 3,00,000. Material handling cost @ 20% of the purchase price will be incurred, as usual, if the part is purchased from Workman Hydraulic Company. Heavy Industrial Machines Limited is able to rent all idle capacity for Rs. 5,00,000 per month. If the Company decides to purchase the 10 units of Part No. T305 from Workman Hydraulic Company, what will be the effect on its profitability? Support your answer with the necessary calculations.