It’s a question from Kaplan kit.
Direct material :$3
Direct labour :$4
Varible overhead :$1
Specific fixed cost :2.5$
Other fixed cost: $2
If the labour were bot used to manufacture the component, it would be used to increase the production of another item for which there is unlimited demand. This other item has a contribution of 10$ per unit but requires $8 of labour per unit.
What is the maximum price per component at which buying is preferable to internal manufacture.
And the asnwer is $15.5. How?
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Question
7y ago#1Does the Kaplan Kit not show the workings for the answer?
Making the component themselves will cost 3 + 4 + 1 + 2.5 = 10.5
However in addition they would be losing contribution that they could have earned from the other item of $10 per unit. However this other item takes twice as long to produce as the component (the labour is $8 instead of $4), and so for every component they make themselves they are losing 10/2 = $5 contribution.
Therefore the total is 10.5 + 5 = $15.5 and this is therefore the most the would be prepared to pay to buy the component externally.
Yes the working was there but it was direct so i couldn’t understand it. Also why didn’t we use other fixed cost in the calculation?
7y ago#3Other fixed costs will still be incurred in total whether we produce this product or not.
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