Nuin Co manufactures a number of different components for the oil industry. The management is considering whether to buy in or continue making one of the components (component A). This component currently has a manufacturing cost as follows:
|
$ |
|||
|
Direct labour (4hr @ $12ph) |
48 |
||
|
Direct materials |
24 |
||
|
Variable overheads (4hr @ $2ph) |
8 |
||
|
Fixed overheads (4hr @ $5ph) |
20 |
||
|
100 per unit |
The direct labour, direct materials and variable overhead costs all relate directly to the production of component A and would not be incurred if production of the component stopped. However, the fixed overheads charge is an apportionment of costs which would still be incurred even if component A were not produced.
Required:
Under each of the three (separate) situations below, advise the management of Nuin Co whether component A should be bought in or made in house:
(a) The purchasing manager has found an external manufacturer that can supply the component A at a guaranteed price of $90 per unit.
(b) The external supplier can offer component A at $90 per unit. If Nuin Co continues to manufacture component A in house, it will need to install new computer controlled manufacturing systems which will have a fixed cost of $50,000 per year.
(C) The external supplier can offer component A at $90 per unit. The manufacture of component A in house requires the use of specialist skilled direct labour. If component A were bought in, that direct labour could be used in the production of component B which is sold for $180 and has a manufacturing cost as follows:
|
$ |
|||
|
Direct labour (8hr @ $12ph) |
96 |
||
|
Direct materials |
18 |
||
|
Variable overheads (8hr @ $2ph) |
16 |
||
|
Fixed overheads (8hr @ $5ph) |
40 |
||
|
170 per unit |