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Use the following information for questions 4 6. Fairfield Company is vertically integrated. The...

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Accounting

Use the following information for questions 4 6.

Fairfield Company is vertically integrated. The company makes a component in the process of

manufacturing its primary product. An outside manufacturer has offered to sell Fairfield Co. the

component at a accost of $20 per unit. Fairfield Companys costs to manufacture the

components are as follows:

Direct Materials $6

Direct Labour 3

Variable Mfg. Overhead 5

Fixed Mfg. Overhead 8

Total $22

Fixed Mfg OH includes $2 of avoidable fixed OH costs related to the supervisors salary and $6 of allocated costs. Assume the quality of the components are the same when made by the outside

manufacturer. The outside manufacturer can deliver the components as needed on time and,

Fairfield has no other use for its facilities used when they make the component.

4. What are the total relevant costs? (2 marks)

5. How much does Fairfield save by continuing to make the product? (3 marks)

6. Should Fairfield continue to make the component themselves? Why or why not? (2 marks)

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