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robber (6/12)
For part a) of this question, I don’t understand why the machine set-up costs have been calculated by multiplying by 500 and dividing by 400.
Also why the machine fixed costs of 4000 and 6000 have been added when arriving at the total cost of manufacturing in-house.
At the back of the book, two approaches have been shown to answering this question. What is the difference between these two approaches.
Also why only incremental or relevant costs are considered when answering part a).
What does the statement material costs are expected to increase by 5% in six months’ time mean and imply. Does it mean that material costs will increase after six months or within six months.
Incremental costs are extra costs. The first approach calculates the total extra cost if they make in-house and compares with the cost of buying externally, The second approach is doing the same thing but on a per unit basis.
If they make in-house then they will have extra fixed costs. They won’t have them if they buy externally.
For the set-up costs, imaginee that they were producing 4,000 units. If they make in batches of 500 then they need 8 set-ups, whereas if they make in batches of 400 then they need 10 set-ups.
Therefore if they change from batches of 500 to batches of 400 they need more set-ups.
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