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.Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier,Joseph Michaels,the production supervisor,said,"That's nuts! This ink is a real pain to make,and $1.24 per millilitre sounds like a bargain to me!" Based on Jim's feelings,Dominique Rudder (a new CPA in the accounting office)did an ABC analysis of ink production.She came up with the same direct materials,direct labour,and variable overhead,as well as the following information on activities required by metallic ink production:
The metallic ink requires 300 purchase orders per year and 80 setups.
$\begin{array}{ll}
\text { Setups } & \$ 60,000600 \text { setups per year } \
\text { Purchasing } & \$ 270,0009,000 \text { purchase orders per year }
\end{array}$ A. If Rudder purchases the ink from the outside supplier, would operating income be higher or lower, and by how much?
B. What is the highest price per millilitre that Rudder would pay an outside company 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.Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier,Joseph Michaels,the production supervisor,said,"That's nuts! This ink is a real pain to make,and $1.24 per millilitre sounds like a bargain to me!" Based on Jim's feelings,Dominique Rudder (a new CPA in the accounting office)did an ABC analysis of ink production.She came up with the same direct materials,direct labour,and variable overhead,as well as the following information on activities required by metallic ink production:
The metallic ink requires 300 purchase orders per year and 80 setups.
 $\begin{array}{ll}
\text { Setups } & \$ 60,000600 \text { setups per year } \
\text { Purchasing } & \$ 270,0009,000 \text { purchase orders per year }
\end{array}$ A. If Rudder purchases the ink from the outside supplier, would operating income be higher or lower, and by how much?
B. What is the highest price per millilitre that Rudder would pay an outside company 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.Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier,Joseph Michaels,the production supervisor,said,"That's nuts! This ink is a real pain to make,and $1.24 per millilitre sounds like a bargain to me!" Based on Jim's feelings,Dominique Rudder (a new CPA in the accounting office)did an ABC analysis of ink production.She came up with the same direct materials,direct labour,and variable overhead,as well as the following information on activities required by metallic ink production:
The metallic ink requires 300 purchase orders per year and 80 setups.
 $\begin{array}{ll}
\text { Setups } & \$ 60,000600 \text { setups per year } \
\text { Purchasing } & \$ 270,0009,000 \text { purchase orders per year }
\end{array}$ A. If Rudder purchases the ink from the outside supplier, would operating income be higher or lower, and by how much?
B. What is the highest price per millilitre that Rudder would pay an outside company for the ink?

Rudder Company Prints a Variety of Publications and Coloured Inserts