Decision Making — OpenTuition Forums

AAloyce11y ago

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 5 PRODUCT B D/material 24 D/Labour 22 D/Expenses 5 Fixed Overhead 10 PRODUCT C D/material 45 D/Labour 44 D/Expenses 35 Fixed Overhead 21 The 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.

John MoffatTutor11y ago#1

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?)

AAloyce11y ago#2

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= 21 Product 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 hour Based 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 Hrs So 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 house B-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= $ 59,400 Additional wages .3*8*1350= $ 3,240 Addition fixed - 1800 Total relevant costs $ 64,440 Costs 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

John MoffatTutor11y ago#3

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.

AAloyce11y ago#4

Yah, may be they have taken that assumption. Anyway, thanks for your help. Atleast i got something

John MoffatTutor11y ago#5

You are welcome :-)

Sign into reply to this topic.