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Hello sir in June 2012 robber question when they do make or buy why are they ignoring the variable elements of machine costs, depreciation.
I did see some old threads related for this however I’m not able to get my head around it
Same querry- Question 154 in BPP revision kit (Robber Co)
if some cost is being relevant in calcuting saving, why its not relevant while making decision?I dont udnerstand this note in BPP solution:
“Note. Attributable fixed costs are not included in the following calculation. Attributable fixed costs remain unaltered irrespective of the level of production of keypads and display screens, because as soon as one unit of either is made, the costs rise. We know that we will make at least one unit of each component as both are cheaper to make than buy. They are therefore an irrelevant common cost.”
as per my understanding if some cost remain unaltered (meaning fixed) then inclusion in first part of question is wrong…
please guide. thanks
In part (a) they are making everything in house and are producing 80,000 units.
If instead they buy the keypads or display screens externally then they won’t be making in -house and therefore they will save the applicable specific fixed costs.In part (b) they want to increase production to 100,000 units but they do not have enough labour available to make them all in-house. Therefore they are forced to buy some externally but will still make some in-house. Even if they only make 1 unit in-house then the specific fixed costs will be incurred. Therefore in deciding how many to buy externally we only need compare the variable costs with the external cost.
Sir but I have to compare cost of making with cost of buying right
So when I do cost of making I will include Dm , Dl, heat and power, the variable elements in machine costs and 40% of depreciation and insurance isn’t it
But that’s ignored in answer
I assume that you are referring to part (b) of the question.
For this part the cost of making are the variable costs which are the materials, the labour, and the activity related costs (i.e. machine set-up costs). As the examiner has written in the answer, because of the wording in the question not being clear, you can also include the heat and power costs.
We do not include depreciation and insurance because this cost will still be incurred for the reason I wrote in my previous reply.
Understood about heat and lower. My concern is machine costs and insurance specifically attributable part. But the specifically attributable part is variable isn’t it. I incur it only if I make it. So when decidinh shouldn’t that be part of consideration as well
The specifically attributable part is only incurred if they make it, but it will be incurred however many they make – even if they only make 1 unit.
We know that they prefer to make (from part (a)) but because they are increasing their supply they do not have enough labour to make all of them.
Therefore they will make what they and buy the rest externally. The fact that they will be making some means that they will incur the specifically attributable costs.
How is the machine set up costs calculated in part a?
The working says machine set – up costs for K is (26k – 4K) * 500/400.I don’t understand why it is multiplied by 500 then divided by 400 and not multiplied by 400 / 500
Please could you help me understand this?
The variable amount varies with the number of set-ups.
At present they make in batches of 500 units, which means there are 80,000/500 = 160 set-ups, and so the cost per set-up for keypads is 22,000 / 160 = 137.50
In future they will make in batches of 400, which means there will be 80,000/400 = 200 set-ups.
Therefore the total variable cost will be 200 x 137.50 = 27,500.
This is the same as 500/400 x 22,000, but obviously it doesn’t matter how you arrive at the total figure 🙂
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