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- This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.
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- September 28, 2020 at 5:40 pm #586927
A company wants to decide whether to make its materials in-house or to sub-contract production to an
external supplier. In the past it has made four materials in-house, but demand in the next year will exceed in-
house production capacity of 8,000 units. All four materials are made on the same machines and require the
same machine time per unit: machine time is the limiting production factor.
The following information is available.
Material W X Y Z
Units required 4,000 2,000 3,000 4,000
Variable cost of in-house manufacture $8 per unit $12 per unit $9 per unit $10 per unit
Directly attributable fixed cost
expenditure$5,000 $8,000 $6,000 $7,000
Cost of external purchase $9 per unit $18 per unit $12 per unit $12 per unit
Directly attributable fixed costs are fixed cash expenditures that would be saved if production of the material
in-house is stopped entirely.
If a decision is made solely on the basis of short-term cost considerations, what materials should the
company purchase externally?
Select… ?
A.4,000 units of W and 1,000 units of Z
B. 4,000 units of W and 4,000 units of Z
C.3,000 units of Y and 2,000 units of Z
D. 1,000 units of Y and 4,000 units of Z
My question – Answer is B . I understand that the difference for additional units for W is -1000 and for Z is +1000 , X is +4000 and Y is +3000 then we definitely need to purchase W from externally but why Z and how did they get 4,000 units for W and Z each.
Can you please help me with that ..
Thanks in advance ..September 29, 2020 at 8:54 am #586963The question says that they require 4,000 units of W, and they will only save $1,000 on W if they buy all 4,000 units externally (otherwise they will not save the fixed costs).
X, Y and Z they would prefer to make all of them in-house, but they cannot because that would be 9,000 units in total and they only have capacity to make 8,000.
So they have to buy some externally even though it will cost them more. The material that has the cheapest extra cost is Z (only an extra 1,000). They will buy all the required 4,000 units of Z externally – if they bought less than 4,000 units then they would not save on the fixed costs so it would be a lot more expensive.
Please do not type out past exam questions in full, because they are copyright of the ACCA.
If it is a past exam question (as this question is) then just give the date of the exam and say which question. (The same applies to questions from the BPP Revision Kit – again they are copyright – so just give the number of the question in the current edition of the Kit.)
September 29, 2020 at 11:21 am #586982Oh apologizes sir I was not aware about that. I will take care of in future.
And yes I get my answer. Thank a lot sir ?September 29, 2020 at 5:42 pm #587009You are welcome 🙂
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