What are the alternatives facing chesbrough inc

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Reference no: EM13948703

Chesbrough, Inc., makes many of the components of its main product in-house. Recently, Berham Electronics offered to supply one component, K-25, at a price of $6.50 each. Chesbrough uses 20,000 units of component K-25 each year. The absorption cost per unit of this component is as follows:

Direct materials	$2.95
Direct labor	0.40
Variable overhead	1.80
Fixed overhead	4.00
Total	$9.15

The fixed overhead is an allocated expense; none of it would be eliminated if pro- duction of component K-25 stopped.

Required

1. What are the alternatives facing Chesbrough, Inc., with respect to production of component K-25?

2. List the relevant costs for each alternative. Suppose that Chesbrough, Inc., purchases K-25 from Berham Electronics. By how much will operating income increase or decrease?

Reference no: EM13948703

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