- June 27, 2021 at 1:42 am #626410xyzcParticipant
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A company wants to decide whether to manufacture its materials in-house or to sub-contract production to an external supplier. In the past it has manufactured four materials in – house, but demand in the next year is expected to exceed in-house manufacturing capacity of 8000 units. All four materials are manufactured on the same machines and require the same machine time per unit: machine time is the limiting factor.
The following information is available
Material w x y z. Units required w 4000 x 2000 y 3000 z 4000. Variable cost of in-house manufacture w 8 per unit x 12 per unit y 9 per unit z 10 per unit. Directly attributable fixed cost w 5000 x 8000 y 6000 z 7000. Cost of external purchase w 9 per unit x 18 per unit y 12 per unit z 12 per unit.
Directly attributable fixed costs are fixed cash expenditures that would be saved if manufacturing of the material in-house is stopped entirely.
If a decision is made solely on the basis of short-term cost considerations, what materials should the company purchase externally?
In the above question, machine time or machine hours are not given. So how to base figures on per machine hour basis.
Also, why would the directly attributable fixed costs would be included when comparing the in-house manufacturing cost with the external purchase cost. Should not only variable costs be used for this purposes.
I calculated the answer to be 4000 units of w and 1000 units of z. Why won’t it be 1000 units of z.
What implication do the sentences (directly attributable fixed costs are fixed cash expenditures and if a decision is made solely on the basis of short-term considerations) have in arriving at the answer.June 27, 2021 at 8:27 am #626436John MoffatKeymaster
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If they make 1,000 units of Z then the directly attributable fixed costs will still be incurred in full. They are only saved is the manufacturing in-house is topped entirely.
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