Question 4 Sam Company Ltd. produces a range of products and absorbs production overhead u
Question 4
Sam Company Ltd. produces a range of products and absorbs production overhead using a rate of 168% on direct wages. The absorption rate was calculated from following budgeted figures:
$
Direct wages 100,000
Fixed production overhead 90,000
Variable production overhead 78,000
Sam is making component W, which is an essential part of product M. The cost of making component W is as follows:
$
Raw material 10
Direct wages 8
Production overhead 18
36
It is found that component W could be bought from an outside supplier at $21. It is unlikely to reduce any production costs even if component W is acquired from outside.
Required:
(a)Determine the overhead absorption rate.
(b)Advise whether the company should continue making component W or buy it from outside.