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Make or Buy

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Make or Buy

  • This topic has 5 replies, 2 voices, and was last updated 5 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • November 3, 2020 at 2:19 am #593890
    Nikitagarwal
    Participant
    • Topics: 154
    • Replies: 147
    • ☆☆☆

    Hello Sir,
    Greetings!
    Question: 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 labour 4.00 
    Variable overhead 1.00 
    Specific fixed cost 2.50 
    Other fixed costs 2.00 
     ––––– 
     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 $10.00 per unit but requires $8.00 of labour per unit. 
    What is the maximum price per component, at which buying is preferable to internal 
    manufacture? 
    As per answer it is 15.5 And as per my understanding I did understood everything except one how and why did they divided the foregne contribution 10/2 while calculating relevant cost ?

    Thanks in advance!

    November 3, 2020 at 10:18 am #593925
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54812
    • ☆☆☆☆☆

    Given that the other item has a labour cost of $8 whereas the current component has a labour cost of only $4, it means that the other item takes twice as much labour.

    November 3, 2020 at 2:43 pm #593953
    Nikitagarwal
    Participant
    • Topics: 154
    • Replies: 147
    • ☆☆☆

    Sir, but we have already added the contribution I really did not understand the relevance of this step ?

    November 3, 2020 at 3:39 pm #593966
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54812
    • ☆☆☆☆☆

    Because there is limited labour and because the other item takes twice as much labour, then making one unit of the other item loses 2 units of the current component.

    November 4, 2020 at 12:54 pm #594045
    Nikitagarwal
    Participant
    • Topics: 154
    • Replies: 147
    • ☆☆☆

    Oh Alright got it.. thank you sir

    November 4, 2020 at 1:27 pm #594052
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54812
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 6 posts - 1 through 6 (of 6 total)
  • The topic ‘Make or Buy’ is closed to new replies.

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