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.
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Hello,
Question:
https://app.box.com/s/dl0tf75lmnhqhkla3k8c5wnq6k4g6t8g
Solution:
https://app.box.com/s/udmgkfmfavz3k3m669yg63ieb01gbygeI’m really not getting my head around solution here, could it be explained, please? Cheers
Ooh yes a tricky one here
Ok -the direct costs of the product are all of those except the ‘other fixed costs’
So
DM + DL + VOH + Specific FOH = $10.50. ( so all these costs will be saved if we buy in) meaning we will pay at least 10.50 to buy in.Not only that – with the labour free then we will make another product with contribution of $10… which we can add on as another benefit of buying in… EXCEPT its not a like for like swap – in fact this other product takes twice as much labour time than the first product ($8 per unit rather than $4 direct labour cost) so we can only get half of the contribution for every unit forgone of the first product.
Therefore the max buying price will be 10.50 saved direct costs + half of the contribution of the other product.
10.50 + 10/2 =$15.50 max buy in price
Hope that explains…
Cath
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