MAKE OR BUY DECISIONS

30
A company wants to decide whether to make its materials in-house or whether to sub-contract
production to an external supplier. In the past, it has made four materials in-house, but demand in
the next year will exceed in-house production capacity of 8,000 units. All four materials are made
on the same machines and require the same machine time per unit: machine time is the limiting
production factor. The following information is available:

Material W X Y Z
Units required 4,000 2,000 3,000 4,000
Variable cost of in-house
manufacture
$8 per unit $12 per unit $9 per unit $10 per unit
Directly attributable fixed cost
expenditure
$5,500 $8,000 $6,000 $7,000
Cost of external
purchase $9 per unit $18 per unit $12 per unit $12 per unit

Required
If a decision is made solely on the basis of short-term cost considerations, what materials should
the company purchase externally?
? 4,000 units of W and 1,000 units of Z
? 4,000 units of W and 4,000 units of Z
? 3,000 units of Y and 2,000 units of Z
? 1,000 units of Y and 4,000 units of Z

Answer
The correct answer is:
4,000 units of W and 4,000 units of Z
Good day sir,I don’t understand why 4000 units of Z is to be purchased externally when there is spare capacity for 3000 units to be produced internally.