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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 of 4,000 of each component. The variable production cost per unit of the final product is as follows:
Machine hours Variable costs $
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.The variable cost of buying in – difference between making it or buying it
You have got scarce resource
You can’t make everything
So you make those which are most expensive to buy in per unit of scarce resourceS. A. T
9. 4. 10They use
3. 2. 4. Machine hrs which are in short supply
So divide one by the other
3. 2. 2.50
You make as many of S that you can, then T then A
Up to a max of 4000 units of eachS. 4000 units at 3 hrs. = 12000 hrs of the 24000 hrs that are available
T Only 3000 units at 4 hrs = 12000 hrs so you have used all the hours upThen buy in the extra
T 1000 units
A 4000 units
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