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Good morning John, may I bother you with a question from bpp book question 122. I am wondering whether there is a typo in answer. I have used the same method you taught us in lecture and work out the answer of 4000 units of W and 1000 units of Z. But the answer is 4000 units of Z. May I ask why is that the case?
Much appreciated for your help!
There is a trick in the question 🙂
Certainly you agree that W should be purchased externally because that will save $1,000.
However, making all of the other three products in-house is not possible because the total is 9,000 units and they only have capacity to make 8,000.
The problem is that if they do as you suggest and only buy 1,000 units of Z externally then they will still have the specific fixed costs (because they would still be making 3,000 units) and so there would be an extra cost of 1,000 x (12 – 10) = $2,000. If, on the other hand, they buy all 4,000 units of Z externally then they will save the fixed costs and the extra cost will only be $1,000. So best is to buy 4,000 units of Z externally 🙂
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