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- This topic has 5 replies, 2 voices, and was last updated 5 years ago by
John Moffat.
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- November 3, 2020 at 2:19 am #593890
Hello Sir,
Greetings!
Question: P is considering whether to continue making a component or to buy it from an outside
supplier. It uses 12,000 of the components each year.
The internal manufacturing cost comprises:
$/unit
Direct materials 3.00
Direct labour 4.00
Variable overhead 1.00
Specific fixed cost 2.50
Other fixed costs 2.00
–––––
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?
As per answer it is 15.5 And as per my understanding I did understood everything except one how and why did they divided the foregne contribution 10/2 while calculating relevant cost ?Thanks in advance!
November 3, 2020 at 10:18 am #593925Given that the other item has a labour cost of $8 whereas the current component has a labour cost of only $4, it means that the other item takes twice as much labour.
November 3, 2020 at 2:43 pm #593953Sir, but we have already added the contribution I really did not understand the relevance of this step ?
November 3, 2020 at 3:39 pm #593966Because there is limited labour and because the other item takes twice as much labour, then making one unit of the other item loses 2 units of the current component.
November 4, 2020 at 12:54 pm #594045Oh Alright got it.. thank you sir
November 4, 2020 at 1:27 pm #594052You are welcome 🙂
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