Question

please give a detailed answer for part B not the same answer as of A

separate answer for B

it will be highly Appreciated

Question No. 1-2 The estimated costs of producing 6,000 units of a component are: Per Unit Direct Material $10 Direct Labor 8 Applied Variable Factory Overhead 9 Applied Fixed Factory Overhead 12 $1.5 per direct labor dollar The same component can be purchased from market at a price of $29 per unit. If the component is purchased from market, 25% of the fixed factory overhead will be saved. Required: a. Should the component be purchased from the market? (1.5 marks) b. Being a production manager, provide your logical opinion on choosing between purchasing the component from market or producing in-house (1 marks)

Answer 1

Solution to Part (A):

Outsourcing decision requires incremental analysis . The incremental amounts are based on the difference in the cost of buying a product or service compared
to the cost of producing the item or providing the service in house. While calculating incremental costs of both the options, only relevant costs should be considered. Relevant costs are those costs which are which are incurred only if a particular decision is undertaken. Relevant costs influences decision making.

Calculation of Relevant cost of Making Product in-house:

Direct Material + Direct Labour + Applied variable factory OH + Applied Fixed Factory OH

= $ (10 + 8 + 9 + 3)

= $ 30 > $ 29 (Outside purchase price)

It is apparent from above calculation that outside purchase price will result in savings of $1 per unit, therefore component should be purchased from outside.

Working note (Showing calculation of Applied Fixed Factory OH computed above):

​​​​​​Only relevant fixed OH should be taken for decision making purpose. Total Applied Fixed Factory OH = 6000 units * $12/ unit = $ 72000.

Out of above amount, $18000 (25% of $72000) will be saved if component is purchased from outside market. Therefore, only $18000 is relevant fixed OH which shall be considered for decision making purpose.

Applied Fixed Factory OH (Relevant) per unit = $ 18000/6000units = $3/ unit.

Solution to Part (B)

Logical opinion as a Production manager:

As explained above, it would not be profitable to make these components in-house. However, the above business entity may prefer to make component, even though it would be financially beneficial to purchase from outside market. Sometimes qualitative factors become very important and can override financial benefits. This can be coupled with uncertainty about the supplier's ability or intention to maintain the price, quality, delivery dates of components etc.

Thus, the above business entity may choice the alternative after due and careful consuderconsi of the facts illustrated above.