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Decision Making

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Decision Making

  • This topic has 6 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 7 posts - 1 through 7 (of 7 total)
  • Author
    Posts
  • November 11, 2015 at 7:51 am #281646
    dansindo
    Member
    • Topics: 24
    • Replies: 38
    • ☆☆

    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: 12.50

    If 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?

    November 11, 2015 at 8:44 am #281664
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    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.

    November 11, 2015 at 4:29 pm #281750
    dansindo
    Member
    • Topics: 24
    • Replies: 38
    • ☆☆

    why only half a unit? It’s not clear to me.

    November 11, 2015 at 5:01 pm #281754
    dansindo
    Member
    • Topics: 24
    • Replies: 38
    • ☆☆

    why did include the contribution to the maximum price per component?

    November 12, 2015 at 5:41 am #281847
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    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.

    November 18, 2015 at 7:28 pm #283687
    dansindo
    Member
    • Topics: 24
    • Replies: 38
    • ☆☆

    Why did u divide the contribution of 10 by 2?

    November 19, 2015 at 7:45 am #283851
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    Because you can see from the labour cost per unit that the other product takes twice as long to make as the first product.

  • Author
    Posts
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