The management of Springer plc is considering next year’s purchase budget. One of the components produced by the company, which is incorporated into another product before being sold, has a budgeted manufacturing cost as follows: Rs Direct material 14 Direct labour (4 hours at Rs 3 per hour) 12 Variable overhead

The management of Springer plc is considering next year’s purchase budget. One of the components produced by the company, which is incorporated into another product before being sold, has a budgeted manufacturing cost as follows: Rs Direct material 14 Direct labour (4 hours at Rs 3 per hour) 12 Variable overhead (4 hours at Rs 2 per hour) 8 Fixed overhead (4 hours at Rs 5 per hour) 20 Total cost 54 per unit Trigger plc has offered to supply the above component at a guaranteed price of Rs 50 per unit. Required: (a) Considering cost criteria only, advise management whether the above component should be purchased from Trigger plc. (5 marks) (b) As a result of recent government legislation if Springer plc continues to manufacture this component the company will incur additional inspection and testing expenses of Rs 56,000 per annum, which are not included in the above budgeted manufacturing costs. Explain how your above advice would be affected accordingly.

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