Reference no: EM133161995

Question - Cosi Ltd. manufactures a variety of engines for use in heavy equipment. The company has always produced all the necessary parts for its engines, including all of the carburettors. An outside supplier has offered to produce and sell one type of carburettor to Cosi Ltd., for a cost of £35.00 per unit. To evaluate this offer, the company has gathered the following information relating to its own cost of producing the carburettor internally: Per Unit 15,000 units per year Direct material £14.00 £210,000 Direct labour £10.00 £150,000 Variable manufacturing overhead £3.00 £45,000 Fixed manufacturing overhead, traceable £6.00* £90,000 Fixed manufacturing overhead. Allocated £9.00 £135,000 Total cost £42.00 £630,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

Required -

a) Supposing that the company has no alternative use for the facilities that are currently being used to produce the carburettors, discuss whether on not the outside supplier offer should be accepted. Show all the computation.

b) Suppose that, the carburettors were purchased, and the company could use the freed capacity to launch a new product. It is expected that the segment margin of the new product would be £150,000 per year. Discuss whether the company should accept the offer to buy the carburettors for £35.00 per unit? (Show all the computation)

c) Define and explain incremental cost and opportunity cost.