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John Moffat.
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- February 3, 2018 at 2:30 pm #434909
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?
4,000 units of W and 1,000 units of Z
4,000 units of W and 4,000 units of Z
3,000 units of Y and 2,000 units of Z
1,000 units of Y and 4,000 units of Z
Need helpFebruary 4, 2018 at 4:57 am #434978Please do not simply set questions and expect an answer – you must have an answer in the same book in which you found the question. You should ask about whatever it is in the answer that you are not clear about, and then I will help you.
This is all covered in my free lectures on short term decision making.
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