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Hi John !
Hope all is well.The following is per unit cost structure of the three items produced by Metal-Make Plc
PRODUCT A
D/material 26
D/Labour 8
D/Expenses 10
Fixed Overhead 5PRODUCT B
D/material 24
D/Labour 22
D/Expenses 5
Fixed Overhead 10PRODUCT C
D/material 45
D/Labour 44
D/Expenses 35
Fixed Overhead 21The direct expenses given above are related to the pressing machine that costs 5 per Hour. These products are also available in the market at A-$ 49 B- $45 and C-$ 145
Production requirement (In units) -A-3700 B-1600 C-1900
Metal make Plc has a metal pressing capacity of 18,000 Hrs, which is not sufficient to produce all three products required. Therefore, managemen is considering the alternative of working in two shifts. Operating shifts would increase the wages by 30%. Fixed costs would increase by 1800
REQUIRED.
You have been asked to help mgt in taking decision, by providing calculations. Keeping in mind the limiting factor, advice mgt which product should be manufactured in house and which should be bought from the Market.Please do not simply set me a question to answer.
Presumably you have an answer in whichever book you found the question, and so ask where you are having a problem with the answer and then I will do my best to help.
(I do assume that you have watched the free lectures on limiting factors?)
Sir, i dont understand the way has been solved in the text book.
Here we go:
They take variable costs for each product and compare with purchase price from outside.
Over purchase price
A-5
B= -6 (Purchase price is less than Variable cost)
C= 21Product B is better to buy from the Market, because the purchase price is less than the costs to make.
For product A and C, we can make in house but keep in mind key factor. So they calculated variable costs per limiting factor
A- 44/2hr=22 Per hour
C- 124/7hr=17.7 Per hourBased on variable costs per limiting factor, we start with the one with the lowest value which is product C.
Product C
1900 Units * 7 = 13,300 HrsSo remaining 4700 hrs ( 18000hrs-13300hrs) is for product A which each unit takes 2 Hrs.
So product A, we can produce only 2350 Units (4700hrs/2hrs).The rest units for product A 1350 Units (3700-2350), they decided to buy from the market.
Therefore, units of
A-1350 Units Purchased from outside
-2350 Units-produced in houseB-1600 Units purchased from outside
C- 1900 Units produced in House
Thats is how the text book has solved the question.
MY PROBLEM IS why they decided to buy from outside 1350 Units of product A instead of make them in house by going extra shift ??
Relevant cost for extra shift to make in house
Variable costs 1350units * 44= $ 59,400Additional wages
.3*8*1350= $ 3,240Addition fixed – 1800
Total relevant costs $ 64,440Costs to buy from outside
49*1350= $ 66,150$ 64,440 is less than $ 66,150. I dont understand their solution, why has decided to buy instead of make them in house.
Thanks
I don’t know where you found this question, but it is a very poor question because the information about the extra wages is not clear.
I can only assume that the answer is treating is a though the workers making A would need paying 30% more for all the hours that they work (not just for the extra units). So the additional wages would be 0.3 x 8 x 3100. That would then make it better to buy the extra.
Yah, may be they have taken that assumption.
Anyway, thanks for your help. Atleast i got something
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