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Question – Robber Co – June 2012
Dear John,
I have a query about the question 34 Robber Co/BPP Kit.
In part A) We shoud advise Robber Co whether it should continue to manufacture the keypads and display screens in-house or outsource their manufacture to the supplier in the Burgistan.So, after doing my calculation I didn’t get how they calculated Machine set-up costs:
Per Kit BPP: Machine Set-up Costs:
K= ($26K-$4K)*500/400
D=($30K-$6K)*500/400
My question: Why they substracted here Fixed costs?
How they calcualted the batches? If they want to change batches to 400 from 500 why they didn’t calculate 500/500 *400?Next question In Fixed Machine Costs:
They have in Depreciation and Insurance: K =($84*40%)
D= ($96*40%)
Are Specific Costs meant relevant costs?Next Question is about the layout: There are two versions for the answer, which one would you recommend for quick answer at the exam?
Method 1: Incremental cost of buying in:
KEYPADS (k) Display(D)
1. Direct Materials
2. Direct labour
3. Heat and light
4. Set-up costs
5. Deprecition and insurance
6. Total costs of making
7. Total costs of buying
8. Saving
9. Conclusion.method 2:
1. Direct materials
2. Direct labour
3. Heat and Power
4. Avoidable fixed costs
5. Activity related costs
6.Avoidable depreciation and insurance
7. Total relevant manufacturing costs.
8. Relevant cost per unit
9. Incremental cost of buying in
10. Conclusion
Many thanks
Jana.They have subtracted the fixed costs because it is only the variable costs that will change if they change the number of batches (and therefore number of set-ups).
With regard to batches, think about this:
If they were to make (say) 10,000 units then at 500 units per batch they would need 20 set-ups. If they change to 400 units per batch, then they will need 25 setups. i.e. more setups.
It will be 500/400 x 20 = 25 setups.Non-specific fixed costs will be incurred whatever they end up producing. However specific fixed costs for each product will only occur if they actually produce that product (so if they don’t produce a product that the fixed costs specific to that product will no longer occur).
With regard to the layout, it doesn’t matter – it is whichever method you find more obvious to you (the time difference isn’t really any different). I personally find the first layout more obvious, but everyone is different and it is more important to understand what you are doing then worry about which might be faster.
Part b – Robber Co (June 2012 Exam)
Hello John,
May I please request you to throw some light on the solved part b answer whereby it’s clear how we come to the figure of “Savings from making per unit” will need your assistance in understanding over “Saving from making per unit of limiting factor” how did we derive to those figures of Keypads being 2.42 and Display screens being 2.27.
Will be grateful for your response over it.
We divide the saving per unit by the labour hours per unit, because labour hours is the limiting factor.
Do watch my free lectures on throughput accounting – although this question is not throughput accounting, the first lecture does revise limited factor analysis.
The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
Hello John,
Could you possibly explain the route to arrive the answer in Part B (Robber Co.) please?
I understand that the labour hours is a limiting factor , therefore use labour hours for each unit of each products to find the contribution per limiting factor. Before I looked at the answer I only thought that I had to find the contribution per limiting factor. Because there is no Sale in the question, so I can’t find the contribution. Could you explain why we use saving from making in stead of contribution/unit in this question to find the priority of making please?
Many thanks for your help in advance
NavindaThe sales price will be the same whether we make or buy, and so this is not relevant to the decision.
The best use of the limited labour available is determined by comparing the saving in costs per hour of buying as against making.
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