Answer to Question #241872 in Management for milikovich

Question

2. Great Company manufactures 60, 000 units of part XL-40 each year for use on its production

line. The following are the costs of making part XL-40:

Direct material

Total

Costs 60,

000 units

Br. 480,000

Cost per

unit

Br.8

Direct labor 360, 000 6

Variable factory overhead

(FOH)

180, 000 3

Fixed FOH 360, 000 6

Total manufacturing costs Br. 1, 380, 000 Br.23

A The entire fixed overhead

would continue if the Great Company bought the component except that the cost of Br. 120, 000

pertaining to some supervisory and custodial personnel could beavoided.

Instructions:

a) Should the parts be made or bought? Assume that the capacity now used to make parts

internally will become idle if the pats are purchased?

b) Assume that the capacity now used to make parts will be either (i) be rented to nearby

manufacturer for Br. 60, 000 for the year or (ii) be used to make another product that will

yield a profit contribution of Br. 250,000 per year. Should the company purchase them from

the outside supplier?

Answer 1

A.) Should be Make. it could less Br120,000 

 

Computations:

 

Cost to Make:

Direct material                                Br. 480, 000 

Direct labor                                            360, 000 

Variable factory overhead (FOH)        180, 000

Avoidable Fixed cost                120,000

Total Costs to Make               1,140,000

 

Cost to buy: (60,000 units x Br21)   Br 1,260,000

 

B.) Company Should Buy and Manufactured other product because it is less costly

 

Computations:

 

Cost to Make:

Direct material                                Br. 480, 000 

Direct labor                                            360, 000 

Variable factory overhead (FOH)        180, 000

Avoidable Fixed cost                120,000

Total Costs to Make               1,140,000

 

Cost to Buy & Rent out:

Direct material                                Br. 480, 000 

Direct labor                                            360, 000 

Variable factory overhead (FOH)        180, 000

Avoidable Fixed cost               120,000

Rent cost                           60,000

Total Cost                       1,200,000

 

Cost to Buy & Manufactured other product:

Cost to buy (60,000 units x 21)     1,260,000

Opportunity costs                  (250,000)

Total cost                        1,010,000