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Hi, please help me with this question…
P limited is considering whether to continue making a component or buy it from an outside supplier. It uses 12,000 of the components each year.
The internal manufacturing cost of a component comprises the following:
D.M $3.00/ unit
D.L 4.00
VOH 1.00
Specific fixed cost 2.50
Other fixed costs 2.00Total cost per unit = $12.50
If the direct labour were not used to manufacture the component it would be used to increase the production of another item for which there is unlimited demand. This other item has a contribution of $10.00 per unit but requires $8.00 of labour per unit.
What is the maximum price per component at which buying is preferable to internal manufacture?
Thanks!
Hi, If you can post the answer for your question next time & explain which part you dont follow – that will be better for me to target the area you need help with.
The cost of making the product in house will be:
The incremental costs of production : (3+4+1+2.5)* 12000 units = $126,000
The opportunity cost of labour which is 12000/2 *10 = 60,000
Total Cost of producing in house =$186,000
Cost per unit will be 186000/ 12000 units = $15.50If we can buy the product cheaper than this price, it will be worthwhile.
I hope that helps – let me know if not
Thanks
Cath
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