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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Make or buy decisions with scarce resources
MM manufactures three components, S, A and T, using the same machines for each. The budget for the next year calls for the production and assembly of4,000 of each component. The variable production cost per unit of the final product is as follows.
Machine hours Variable cost $
1 unit of S 3 20
1 unit of A 2 36
1 unit of T 4 24
Assembly 20
Only 24,000 hours of machine time will be available during the year, and a subcontractor has quoted the following unit prices for supplying components: S $29; A $40; T $34.
Required
Advise MM.
Dear John, the solution of above question is clear for me, it is based on extra variable cost of buying per hour saved, so:
to make S and T – total V.C. is $152000
to buy T and A – total V.C. is $346000
My question, why we do not rank product based on variable cost per machine hour? If so:
to make A(4000 un), S (4000un) and T (1000un) – total V.C. is $248000
to buy T (3000 un) – total V.C. $102000
It seems much cheaper for MM …. or I misunderstand something 🙁
Dear John, please ignore above question as I did miscalculation. I got it, thanks.
No problem – I am pleased that you have now got it 🙂
