Reference no: EM132543207

Pogrom Ltd is a company that producing and selling Electric Scooter Toy for kids that consists of Scooter toy and Electronic components. The company is expecting to produce 20 000 units of Scooters. Currently, Pogrom Ltd makes the Electronic components in-house for the Scooters.

The cost data to make the Electronic components for 30 000 Scooters are as follows:

Direct material cost per unit $9.00

Direct labour cost per unit $6.00

Variable manufacturing overhead $3.00 Inspection, set-up, material handling per batch $200

Allocated committed fixed cost (admin, taxes and insurance) $50,000

Recently, Pogrom Ltd received a call from an outside supplier who offered to supply the Electronic components at $18.00 per Electronic components. The management of Pogrom Ltd considers this offer and starts to obtain more data before make the decision. Inspection, set-up and materials handling costs vary with the number of batches in which the Electronic components are produced. Pogrom Ltd produces the Electronic components for the Scooter in batch sizes of 1 000 units and will produce the 20 000 units in 20 batches.

Required (show your workings):

Question (a) Assume that Pogrom Ltd purchases the Electronic components from the outside supplier, the facility where the Electronic components are currently made will remain idle (unused). On the basis of financial considerations alone, should Pogrom Ltd accept or reject the offer from the outside vendor at the anticipated production (and sales) volume 20 000 units?

Question (b) Assume that, if the Electronic components are purchase from outside, the facilities where the Electronic components are currently made will be used to make a new product that will bring a contribution of $105 000. An additional tooling costs of $100 000 would be incurred to make this new product. On the basis of financial considerations alone, should Pogrom Ltd make or buy the Electronic components, assuming that 20 000 Scooters are produced and sold?

Question (c) Using the part (b) assumption, the sales manager of Pogrom Ltd is concerned that the estimation of 20 000 units may be too high and it is believed that only 18 000 units will be sold and therefore it needs to buy only 18,000 units. At this lower output, Pogrom Ltd will produce the Electronic components in 18 batches of 1 000 units each. On the basis of financial considerations alone, should Pogrom Ltd purchase the Electronic components from the outsider suppliers?