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  • This topic has 4 replies, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • April 18, 2016 at 3:04 pm #311331
    boma77
    Member
    • Topics: 70
    • Replies: 97
    • ☆☆

    Dear Tutor,

    I have a question from the exam kit from Kaplan, Q: 66

    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?
    A $8.00
    B $10.50
    C $12.50
    D $15.50

    The answer is D.

    There is a working for labour costs
    W1) Relevant cost = Contribution Forgone + Direct labour = $10/2 + $4 = $9.

    Could you please explain to me the meaning of $10/2? I hought that the contribution forgone would be 10-8.

    Kind regards

    April 18, 2016 at 3:48 pm #311365
    boma77
    Member
    • Topics: 70
    • Replies: 97
    • ☆☆

    I think I misread the question 10 is the contribution and not the revenue. Is the 10/2 (8/4) because the other item requires 2x labour compared to the first?

    April 19, 2016 at 7:51 am #311598
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    The relevant cost is the contribution plus the labour. As you have realised, component takes half the time of the “other item” (because the labour is only $4 but is $8 for the other item), and therefore the contribution foregone for each component is half of the contribution for the other item.

    April 19, 2016 at 9:22 am #311635
    boma77
    Member
    • Topics: 70
    • Replies: 97
    • ☆☆

    thank you.

    April 19, 2016 at 2:20 pm #311704
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
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