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Make or Buy

NNikita5y ago
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!
John MoffatJohn MoffatTutor5y ago#1
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.
NNikita5y ago#2
Sir, but we have already added the contribution I really did not understand the relevance of this step ?
John MoffatJohn MoffatTutor5y ago#3
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.
NNikita5y ago#4
Oh Alright got it.. thank you sir
John MoffatJohn MoffatTutor5y ago#5
You are welcome :-)
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