Rudder Company prints a variety of publications and coloured inserts for newspapers. Currently, Rudder produces its own ink, including a special metallic colour. India Inks has offered to supply Rudder with the 25,000 mL of metallic ink that it needs each year for $1.24 per millilitre. Rudder is interested because this is a particularly difficult ink to make. Purchasing must make special efforts to locate suppliers; the metallic component requires special handling; and, since the metallic ink uses machinery that is also used to make other colours of ink, the machinery must be cleaned very well before every batch of metallic. The accounting department supplied the following unit costs:
*Fixed overhead is applied on the basis of a plant-wide rate based on direct labour hours.
$\begin{array}{lr}
\text { Direct materials } & \$ 0.40 \
\text { Direct labour } & 0.15 \
\text { Variable overhead } & 0.06 \
\text { Fixed overhead* } & 0.50
\end{array}$
-Refer to the Figure.
A. Based on the cost figures, if Rudder purchases metallic ink from the outside supplier, will operating income be higher or lower, and by how much?
B. What is the highest price per millilitre that Rudder would pay an outside supplier for the ink?

Question

Rudder Company prints a variety of publications and coloured inserts for newspapers. Currently, Rudder produces its own ink, including a special metallic colour. India Inks has offered to supply Rudder with the 25,000 mL of metallic ink that it needs each year for $1.24 per millilitre. Rudder is interested because this is a particularly difficult ink to make. Purchasing must make special efforts to locate suppliers; the metallic component requires special handling; and, since the metallic ink uses machinery that is also used to make other colours of ink, the machinery must be cleaned very well before every batch of metallic. The accounting department supplied the following unit costs:
*Fixed overhead is applied on the basis of a plant-wide rate based on direct labour hours.
 $\begin{array}{lr}
\text { Direct materials } & \$ 0.40 \
\text { Direct labour } & 0.15 \
\text { Variable overhead } & 0.06 \
\text { Fixed overhead* } & 0.50
\end{array}$
-Refer to the Figure.
 A. Based on the cost figures, if Rudder purchases metallic ink from the outside supplier, will operating income be higher or lower, and by how much?
B. What is the highest price per millilitre that Rudder would pay an outside supplier for the ink?

Quizplus · Accepted Answer

The Answer of Rudder Company prints a variety of publications and coloured inserts for newspapers. Currently, Rudder produces its own ink, including a special metallic colour. India Inks has offered to supply Rudder with the 25,000 mL of metallic ink that it needs each year for $1.24 per millilitre. Rudder is interested because this is a particularly difficult ink to make. Purchasing must make special efforts to locate suppliers; the metallic component requires special handling; and, since the metallic ink uses machinery that is also used to make other colours of ink, the machinery must be cleaned very well before every batch of metallic. The accounting department supplied the following unit costs:
*Fixed overhead is applied on the basis of a plant-wide rate based on direct labour hours.
 $\begin{array}{lr}
\text { Direct materials } & \$ 0.40 \
\text { Direct labour } & 0.15 \
\text { Variable overhead } & 0.06 \
\text { Fixed overhead* } & 0.50
\end{array}$
-Refer to the Figure.
 A. Based on the cost figures, if Rudder purchases metallic ink from the outside supplier, will operating income be higher or lower, and by how much?
B. What is the highest price per millilitre that Rudder would pay an outside supplier for the ink?

Rudder Company Prints a Variety of Publications and Coloured Inserts