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kaplan – limiting factors

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › kaplan – limiting factors

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • November 23, 2018 at 5:23 pm #485671
    storm
    Member
    • Topics: 14
    • Replies: 12
    • ☆

    P is considering whether to continue making a component or to buy it from an outside
    supplier. It uses 12,000 of the components each year.
    The internal manufacturing cost comprises:
    $/unit
    Direct materials 3.00
    Direct labor 4.00
    Variable overhead 1.00
    Specific fixed cost 2.50
    Other fixed costs 2.00
    –––––
    12.50
    –––––
    If the direct labor 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 $10.00 per unit but requires $8.00 of labor per unit.
    What is the maximum price per component, at which buying is preferable to internal
    manufacture?
    A $8.00
    B $10.50
    C $12.50
    D $15.50

    Direct material 3.00
    Direct labour (W1) 9.00
    Variable overhead 1.00
    Specific fixed cost 2.50
    –––––
    15.50
    (W1) Relevant cost = Contribution Forgone + Direct labour = $10/2 + $4 = $9

    sir i dont understand why they have divided contribution forgone by 2
    your kind assistance please..

    November 24, 2018 at 9:11 am #485755
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54702
    • ☆☆☆☆☆

    It is because the ‘other item’ has a labour cost of $8 per unit, whereas the component has a labour cost of only $4 per unit. So the ‘other item’ takes 2 times as long to make.

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    Posts
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