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Sir can u pls help with this question.
P is considering whether to continue a component or to buy it from an outside supplier. It uses 12,000 of the components each year.The internal manufacturing costs comprises:
$ /unit
Direct materials- 3
D. Labour- 4
Variable Overhead- 1
Specific Fixed Cost- 2.50
Other fixed costs- 2
Total: 12.50If the direct labour were not used to manufacture the component, it would be used to increase the production of another item for which there is unlimited demand. This other item has a contribution of $10 per unit but requires $8 of labour per unit.
What is the maximum price per component, at which buying is preferable to internal manufacture?
Surely you have an answer to this in whichever book you found the question?
In future please ask about whichever part of the answer is giving you a problem instead of just setting it to me as a test question!
If they stop producing it themselves, then every unit they stop will allow them to produce half a unit of the other item and therefore generate a contribution of $5.
Therefore the most they will be prepared to pay to get the component from outside is 3 + (4 + 5) + 1 + 2.50.
The labour for this unit is $4 and for the other is $8.
So every current unit takes half the time of the other unit.
The contribution is included because this is being earned from the labour, if they buy the component from outside.
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