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It’s a question from Kaplan kit.
Direct material :$3
Direct labour :$4
Varible overhead :$1
Specific fixed cost :2.5$
Other fixed cost: $2If the labour were bot used to manufacture the component, it would be used to increase the production of another item for which there is unlimited demand. This other item has a contribution of 10$ 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?
Does 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?
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