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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
You 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 2I 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.
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