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Lavender is considering whether to make or buy some of the components used in the...

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Question

Accounting

Lavender is considering whether to make or buy some of the components used in the production of deodorants. The annual cost of producing these components used by the company is as follows:

Component A

Component B

Direct variable manufacturing costs

$300,000

$200,000

Direct fixed manufacturing costs

$100,000

$50,000

Allocated overhead

$50,000

$50,000

Quantity produced

100,000

200,000

The fixed manufacturing costs allocated to component A would be reduced by 80% if the company were to discontinue production of component A. As part of the company cost planning and cost control of operations and activities, management is now reviewing the unit product cost of the components used in the production of its deodorants.

Required

  1. What are the unit product costs of component A and B considering both are produced by the company? (2 marks)

  1. Which and how much are the relevant and irrelevant costs in the decision of discontinuing production of component A? (6 marks)

  1. Considering only component B is produced by the company, what is the unit product cost of component B? (2 marks)

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