Reference no: EM13600435

2011 costs:

• direct material cost per item $180
• direct manufacturing labor per item $50
• variable manufacturing costs per batch $1600
• Fixed manufacturing costs that can be avoided if item not made $320,000
• fixed manufacturing costs that can't be avoided whether or not item is made $800,000

Expected 2012 Costs:

• Direct cost per item $170
• direct manufacturing labor per item $45
• variable manufacturing costs per batch $1500
• Fixed manufacturing costs that can be avoided if item not made $320,000
• fixed manufacturing costs that can't be avoided whether or not item is made $800,000

8000 items manufactured in 2011 (40 batches of 200)

10,000 items expected to be manufacture in 2012 (80 batches of 125)

X Pty Ltd and approached offering to supply the items in 2012 at $300 per item on whatever delivery schedule Z Pty Ltd wants.

1) Caculate total expected manufacturing cost per item in 2012

2) On financial basis alone, should Z Pty Ltd choose to purchase items from X Pty Ltd or continue to manufacture them (capacity used to make items will become idle)

3) If Z pty Ltd chooses to buy from X Pty Ltd, they will then thoose to manufacture and sell special items instead.

• Estimated incremental future revenues from special items $2,000,000
• Estimated incremental cost to make and sell special items $2,150,000
• Should the continue to make items, or choose to purchase them from X Pty Ltd?