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hello sir. my answer mat($3) + lab ($9) + var OH($1) + specific fixed costs($2.50) + other fixed costs($2) =17.50 but the answer is 15.50(leaving other fixed costs). so my question is why was other fixed cost not included in the cost card?
thanks.
I do not have the Kaplan Kit (only the BPP Revision Kit).
If it is marked as a past exam question then tell me which question because I have all the past exams.
Otherwise, without seeing the question I cannot give you a definite answer (it depends on what exactly the situation was), but presumably there are several products involved and the total of ‘other fixed costs’ will remain the same whether or not this product is produced. The ‘specific fixed costs’ will only occur if this product is produced.
This is the question:
P is considering whether to continue making a component or to buy it from outside supplier. it uses 12000 of the components each year. the internal manufacturing costs comprises:$/unit
materials 3.0
labour 4.0
variable OH 1.0
specific OH 2.5
other fixed cost 2.0
——–
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 ?
A) $8 B) $10.50 C) $12.50 D)$15.50.
The correct answer is 15.50. i did understood the labour adjustment but i could not understand why other fixed costs was left out.
thanksThe ‘other fixed costs’ have been left out for the reasons I stated in my previous reply.
They will be an allocation of the total fixed costs of the company (because they are not specific to the product) and the total of those fixed costs will not change if we buy the component from outside – the total will simply be shared between the remaining products.
Have you watched my free lectures on make and buy, because I do explain the difference between the two types of fixed costs and the reasoning?
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