Question

Upstate Mechanical, Incorporated, has been producing two bearings, components T79 and B81, for use in production. Data regarding these two components follow.

T79 B81
Machine hours required per unit 2.5 3.0
Standard cost per unit:
Direct material $ 2.25 $ 3.75
Direct labor 4.00 4.50
Manufacturing overhead
Variable*Footnote asterisk 2.00 2.25
Fixed†Footnote dagger 3.75 4.50
Total $ 12.00 $ 15.00
*Footnote asteriskVariable manufacturing overhead is applied on the basis of direct-labor hours.

†Footnote daggerFixed manufacturing overhead is applied on the basis of machine hours.

Upstate Mechanical’s annual requirement for these components is 8,000 units of T79 and 11,000 units of B81. Recently, management decided to devote additional machine time to other product lines, leaving only 41,000 machine hours per year for producing the bearings. An outside company has offered to sell Upstate Mechanical its annual supply of bearings at prices of $11.25 for T79 and $13.50 for B81. Management wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the firm can minimize costs (maximize net benefits).

Required:
1. Compute the net benefit (loss) per machine hour that would result if Upstate Mechanical accepts the supplier’s offer of $13.50 per unit for component B81.

Answer 1

The net benefit (loss) per machine hour for accepting the supplier's offer of $13.50 for component B81 is $0.50.

Step-by-step explanation:

To compute the net benefit (loss) per machine hour if Upstate Mechanical accepts the supplier’s offer of $13.50 per unit for component B81, we need to calculate the total cost of producing B81 internally and compare it to the price offered by the supplier.

First, we need to calculate the total cost per unit of B81 using the given information:

Total cost per unit of B81 = Direct material cost + Direct labor cost + Variable manufacturing overhead + Fixed manufacturing overhead

= $3.75 + $4.50 + $2.25 + $4.50

= $15.00

So, the total cost of producing one unit of B81 internally is $15.00.

Now, let's compare this to the supplier's offer price of $13.50 per unit of B81.

Net benefit (loss) per machine hour = (Cost of producing internally - Supplier's offer price) / Machine hours required per unit of B81

= ($15.00 - $13.50) / 3.0

= $1.50 / 3.0

= $0.50

Therefore, if Upstate Mechanical accepts the supplier’s offer of $13.50 per unit for component B81, they will have a net benefit of $0.50 per machine hour.