Hi John
. A company makes a product which requires two sequential operations (Operation 1 and Operation 2) on the same machine. The machine is fully utilised. Material costs $12 per unit.
Instead of carrying out Operation 1, the company could buy in components, for $15 per unit. This would allow production to be increased because the machine has to deal with only Operation 2.
Operation 1 takes 0.25 hours of machine time and Operation 2 takes 0.5 hours of machine time. Labour and variable overheads are incurred at a rate of $16/machine hour and the finished products sell for $30 per unit.
i cant figure the answer for this. the answer says 15000 and 10500.. i dont understand. can u help
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Costing
6y ago#1You will have to say what the question requires, and then I will hopefully be able to explain the answer.
Sorry John
The question is
Should the company make the entire products internally or buy and complete in it in operation 2
6y ago#3I can only assume that the figures you are quoting from the answer are part of the way they are explaining the answer. The question for not ask for those numbers - it simply asks whether it is better to make or buy. (Unless there is more in the question than you have typed - for example, how many units they are making).
Otherwise, imagine they are currently making 100 units internally - that means that the machine is working 100 x (0.25 + 0.5) = 75 hours.
If they buy the component externally, then they 75 hours could all be used just on operation 2 and so they could produce 75/0.5 = 150 units.
If they make 100 units internally, then the revenue is 100 x $30 = $3,000. The material costs are 100 x $12 = $1,200. So the profit before labour and variable costs is $1,800.
If they buy 150 components instead, then the revenue is 150 x $30 = $4,500. The component costs are 150 x $15 = $2,250. So the profit before labour and variable costs are $2,250.
(Labour and variable costs stay the same, because the machine is working the same number of hours in both cases).
Therefore the profit is higher by $450 if they buy the components and so this will be better.
Thank you. Its perfect :)
6y ago#5You are welcome :-)
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