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sir there is a question robber co (June 2012) in the 2 part of quesiton the ranking based on saving was require.
what my concern is that in the answer the display screen was 66666 make and 33334 buy
now if we make 66666 inhouse the fixed cost will still be same
based on this the cost of making 66666 units in house comes to = 208320*66666/80000(variable cost)+ (58000+6000+38400)fixed cost= 275998 and for 33334= 143336
the total comes to= 419334
and if we buy whole of the 100000 units of display screen cost is 430000
if we see the difference it is only 10000, which means that even a slight less available hours or more labour per hour requirement of display screen would make buying cheaper.
THIS means that fixed becomes relevant in this case, but the examiner states that the fixed cost are irrelevant common cost. the examiner also states that we will make atleast one unit of both as it is cheaper to make than buy. I feel that it is cheaper to make than buy when 80000 units are required. but if only one unit would have been there, then buy is definitely cheaper because of specific fixed cost of makingThe cost analysis you have performed is correct. Based on this analysis, even a slight decrease in available hours or an increase in labour per hour requirement for the display screens would make buying them cheaper. This suggests that fixed costs become relevant in this case. However, the examiner states that the fixed costs are irrelevant common costs. The examiner also mentions that at least one unit of both components will be made in-house because it is cheaper to make than to buy.
It is important to note that the decision to make or buy is based on the analysis of total costs and the specific circumstances of the company. In this case, making the display screens in-house is still more cost-effective, even when considering the fixed costs.So sir it means it is better to check by total cost method and do not just rely on ranking when there is fixed cost
also sir there is one more problem….
the ranking when make vs buy with a limiting factor is based on SAVING=EXTERNAL PURCHASE COST-VARIABLE COST TO MAKE. THIS GIVES THE CHEAPEST OPTION TO PRODUCE/BUY DECISION.BUT THERE IS A PARTICULAR SCENARIO.
PRODUCT X Y Z
UNITS REQUIRED 2000 3000 4000
VARIABLE COST TO MAKE $12 $9 $10
ATTRIBUTABLE FIXED COST $11000 $6000 $6500EXTERNAL PURCHASE COST $18 $12 $12
SAVING(PURCHASE PRICE- $6 $3 $2
VARIABLE COST)
RANK 1 2 3ONLY 8000 UNITS CAPACITY IS THERE
SO TOTAL COST = (2000*12+11000)+(3000*9+6000)+(4000*12)=$116000
NOTE: ALL OF Z ARE EXTERNALLY PURCHASED SINCE USING 3000 AVAILABLE CAPACITY FOR Z WILL GIVE A HIGHER COST DUE TO SPECIFIC FIXED COST.
BUT SIR FOR INSTANCE IF WE DO NOT FOLLOW THE RANKING AND GO MAKING IN ORDER OF Z,Y,X THEN TOTAL COST COME:
(4000*10+6500)+(3000*9+6000)+(2000*18)=$115500
AGAIN ALL OF X SHOULD PURCHASED SINCE ONLY MAKING 1000 UNITS WILL HAVE INCURRED FIXED COST MAKING IT EXPENSIVE.BASED ON THIS COMPARISION IT SEEMS THAT RANKING FALLS WRONG….SO I GUESS THERE IS SOME MORE TO RANKING(ESPECIALLY WHEN THERE IS SPECIFIC FIXED COST.)
Can you please explain again bpp revision kit question 169 Robber(june 2012)
I still cant understand the set up cost part which is divided in batchesSince it relates to set-up costs, it will vary with the number of set-ups needed.
If variable cost is $22,000
And they are producing 80,000 units in batches of 500, which means that they are producing 80,000/500 = 160 batches.
This means that the variable cost per batch is $22,000/160 = $137.50
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