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Capacity : 8000 units
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?
Products W X Y Z
Demand 4000 2000 3000 4000Buy 9 18 12 12
Make 8 12 9 10Extracost per unit of external purchase 1 6 3 2
Total extra cost of external purchase 4,000, 12,000, 9,000, 8,000
Fixed costs saved by not making (5,000) (8,000) (6,000) (7,000)
in-house
Difference (1,000) 4,000 3,000 1,000Answer :The correct answer is: 4,000 units of W and 4,000 units of Z.
I understood everything except units of z. Cost saved by not making inhouse for W is 1000 as FC exceeds external buying. Therefore can buy entire 4000 units of W from outside.
As in house capacity is there till 8000 units, if ranked can make X, Y, Z on priority and can make 2000 of X, 3000 of Y and 3000 of Z. Therefore only 1000 units can be purchased externally.
But answer is both W and Z 4000 units. I don’t understand why Z 4000 units instead of 1000 units for external purchase.
It is because if they only purchased 1,000 units of Z externally then they would be producing the other 3,000 internally and would therefore still have to pay the whole of the fixed costs of $7,000.
For each of the products, they will only be saving the fixed costs if all of the units were purchased externally and none produced internally.
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