Reference no: EM132786640

Question - Goutam Company prints a variety of publications and colored inserts for newspapers. Currently, Goutam produces its own ink, including a special metallic color. India Inks has offered to supply Goutam with the 25,000 ounces of metallic ink that it needs each year for $1.24 per ounce. Goutam is interested because this is a particularly difficult ink to make. The purchasing department 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 colors of ink, the machinery must be cleaned very well before every batch of metallic. The accounting department supplied the following unit costs:

Direct materials $0.40

Direct labor 0.15

Variable overhead 0.06

Fixed overhead* 0.50

*Fixed overhead is applied on the basis of a plantwide rate based on direct labor hours.

Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier, Jim Webb, the production supervisor said "That's nuts! This ink is a real pain to make and $1.24 per ounce sounds like a bargain to me!" Based on Jim's feelings, Anna Ruiz (a new CMA in the accounting office) did an ABC analysis of ink production. She came up with the same direct materials, direct labor and variable overhead, as well as the following information on activities required by metallic ink production.

Setups $ 60,000 600 setups per year

Purchasing $270,000 9,000 purchase orders per year

The metallic ink requires 300 purchase orders per year and 80 setups.

A. If Goutam purchases the ink from the outside supplier, operating income would be $__________________ Higher Lower (circle one).

B. What is the highest price per ounce that Goutam would pay an outside company for the ink?