Question

Swagat Manufacturing Sdn. Bhd. needed to determine if it would be cheaper to make 10,000 units of a component in-house or to purchase them from an outside supplier for $4.75 each.
Cost information on internal production includes the following:
Total Cost Unit Cost
$ $

Direct materials 10,000 1.00
Direct labour 20,000 2.00
Variable overheads 8,000 0.80
Fixed overheads 44,000 4.40
Total 82,000 8.20
Fixed overhead will continue whether the component is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.
Required:
b. Which alternative is more cost effective and by how much?
c. Now assume that the fixed overhead includes $10,000 of cost that can be avoided if the component is purchased externally. Which alternative is more cost effective and by how much?

Answer 1

Answer on question #59215 -Economics - Microeconomics

Swagat Manufacturing Sdn. Bhd. needed to determine if it would be cheaper to make 10,000 units of a component in-house or to purchase them from an outside supplier for $4.75 each.

Cost information on internal production includes the following:

Fixed overhead will continue whether the component is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.

Required:

b. Which alternative is more cost effective and by how much?

c. Now assume that the fixed overhead includes $10,000 of cost that can be avoided if the component is purchased externally. Which alternative is more cost effective and by how much?

Solution

b)

Producing in-house 10,000 of units is more effective than purchasing components externally. Total production costs are less by $9,500 than purchasing outside because fixed overheads have an essential portion in the cost structure the company.

So, producing internally has higher effectiveness by 11.59% than externally purchasing.

c)

In the second case, if company produces 10,000 of units internally, the firm's production is more expensive than purchasing components externally.

The company's total production costs will grow by $500 than purchasing outside if fixed overheads will be reduced by$ 10,000 for buying outside.

So, the purchasing outside has higher effectiveness by 0.61% than internal production.

Answer

b) The production in-house would be more effective by 11.59 percent than the buying outside.

c) The purchasing of components externally would be cheaper by 0.61 % than producing them in-house.

https://www.AssignmentExpert.com