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Sir
I didn’t understand why products 1000 units each of X, Y and Z needs to be purchased externally.
8000 units is the maximum capacity of the company and when 4000 units of W can be bought externally, only 1000 units of Z needs to be bought along with it.
The rest of the units 2000 of X+ 3000 of Y + 3000 of Z will make up to the internal capacity of 8000 units right?Q112 in the current edition of the BPP Revision Kit has nothing about X, Y and Z. It is about price elasticity of demand.
I am using the one valid up to June 2021. However I have found the question – it is number 122 in the current edition.
If they buy 4,000 units of W externally they will save $1,000. If in addition they bought only 1,000 units of Z externally then they would have an extra cost for Z of 2,000 (the variable cost) because since they would still be making some Z’s in-house they would not be saving the fixed costs. So doing that would lose them a net $1,000.
If however the buy all 4,000 units of Z externally (and produce none themselves) then they would save the fixed costs and the extra cost would only be 1,000. So buying 4,000 W and 4,000 Z externally would have no net effect the costs. Any other way would increase the costs overall.
Thank you Sir. I have cleared PM and I’m extremely grateful to you for your guidance and notes.
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