Solution Exhibit 21.16
Annual relevant costs of purchasing from Papyrus and Suffolk Leaves
Incremental
costs of
purchasing
from Papyrus
Incremental
costs of
purchasing
from Suffolk
Purchase costs
£100 per box
× 100,000 boxes
£95 per box
× 100,000 boxes Required return on investment
15% per year
× £100 × a boxes of average stock per year
15% per year
× £95 × a boxes of average stock per year Overtime and subcontracting costs No overtime necessary Overtime due to late deliveries (£30,000
× 10 jobs) Costs of poor quality and smudging Total relevant costs
£10,000,000
3,000
0 0
£10,003,000
£ 9,500,000
2,850
300,000 b Difference in favour of Papyrus
£44,850
a
Order quantity ÷ 2 = 400 ÷ 2 = 200. b The relevant costs of poor quality and smudging per job are Additional costs of printing paper (£110 per box
× 400 boxes)
£44,000 Additional other direct materials (ink and soon Additional variable printing overhead
3,000 Total relevant costs of poor quality per job
£49,000
Relevant costs of poor quality for five jobs during the year (£49,000
× 5)
£245,000
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