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I am solving question #86 in revision kit and did not get why 4000 units of Z was decided to purchase externally? Please help!
This is the question:
A company wants to decide whether to make its materials in-house or whether to sub-contract production to an external supplier. In the past it has made four materials in-house, but demand in the next year will exceed in-house production capacity of 8,000 units. All four materials are made on the same machines and require the same machine time per unit: machine time is the limiting production factor.The following information is available.
Material W X Y Z
Units required 4,000 2,000 3,000 4,000
Variable cost of in-house manufacture:
$8 per unit $12 per unit $9 per unit $10 per unit
Directly attributable fixed cost expenditure:
$5,000 $8,000 $6,000 $7,000
Cost of external purchase:
$9 per unit $18 per unit $12 per unit $12 per unit
Directly attributable fixed costs are fixed cash expenditures that would be saved if production of the material in-house is stopped entirely.
If a decision is made solely on the basis of short-term cost considerations, what materials should the company purchase externally?I don’t have answer in front of me but I am going to assume due to mental calculations that it involves producing all of x and y requirements in house.The reason for doing this and not using spare capacity to manufacture partially z is because directly attributable fixed costs are cash expenses that are only saved if manufacture of relevant material is stopped entirely.This is therefore the best option given decision criterion of question.These are future cash expenses that will be saved only if z manufacture is stopped completely.Hope this helps.If you want further explanation please ask.Hope my mental calculations are correct.
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