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P is considering whether to continue making a component or to buy it from an outside supplier. It uses12000 of components each year
The internal manufacturing cost consist
$ per unit
Specific FC 2.5
other FC 2
If DL were not used to manufacture the component it would be used to increase production of another item for which there is unlimited demand. This other item has contribution of $10 per unit but requires $8 of labour per unit.
What is max price per component, at which buying is preferable to internal manufacture
Here in solution, direct labour they have taken $9 i.e ( 10/2 + 4). Sir here how they have taken contribution forgone 10/2 ?
Because the other item requires $8 of labour, whereas the the item we are considering only takes $4 of labour, it means that this item must only take half the time of the other item (and therefore generate half the contribution per hour).