Question

Search TextboxTU 2. Felter Comp X C Sea Ch.ca/d21defcontent/139663/viewContent/4940174Niew #3. (5 Marks) Essex Manufacturing makes Part X as part of the manufacture of Product Y. It has an opportunity to buy the part instead of making it on their own. Part X requires $140 of direct materials, $50 of direct labour and has other variable costs of $10. Fixed overhead allocated to Part X is $70 per unit of which 30% is related to building occupancy and the remainder is salaries for supervisors and maintenance people that would not be required any longer. If they buy the part, it will cost them $235. a) Assuming that the space is left vacant, should they make or buy the part? (show calculations) b) Assuming that they produce 5,000 parts annually and can rent the space for $30,000 should they make or buy the part? (show calculations)

Answer 1

MANUFATURE BUY (A) PARICULARS DIRECT MATERIAL DIRECT LABOUR OTHER VARIABLE COST SALARIES (70*70%) PURCHASE COST 140 50 10 49 235 TOTAL COST 249 235 CONCLUSION IF THEY MANUFATURE THE PART "X',IT WILL COST TO $ 249(SINCE BUILDING IS VACANT,THEIR NOTIONAL RENT IS IRRELEVANT FOR DECISION MAKING)IF THEY BUY THIS,IT WILL COST 235.SINCE IT IS GIVEN IN QS THAT SALARIES FOR SUPERVISORS & OTHERS WOULD NOT BE REQUIRED ANY LONGER,SO IT IS TAKEN IN MANUFACTURING OPTION DEPSITE OF BEING IN FIXED CCOST IN NATURE SO-GO FOR BUY OPTION IF THEY MANUFACTURE 5000 UNITS COST OF MANUFACTURING VARIABLE COST {( 140+50+10)/U} (B) 10,00,000 RENTAL INCOME LOST DUE TO BUILDING OCCUPANCY 30,000 SALARIES (49/U) 2,45,000 TOTAL COST 12,75,000 IF THEY BUY 5000 UNITS PURCHASE COST 11,75,000 LESS: RENTAL INCOME -30,000 NET COST 11,45,000 CONCLUSION GO FOR BUY OPTION