Question

Mindanao Company needed to determine whether to manufacture 8,000 units of X component in-house or to...

  1. Mindanao Company needed to determine whether to manufacture 8,000 units of X component in-house or to buy those units from a supplier at price of $22 per unit. The cost information for in-house manufacturing 8,000 units of X component is provided below.

Cost components

$

Direct materials

80,000

Direct labour

56,000

Fixed overhead

32,000

Variable overhead

24,000

The fixed overhead will remain the same whether X component is manufactured in-house or purchased externally.

Required:

  1. Calculate the relevant costs for in-house manufacturing of X and buying it from outside supplier. Show calculations per unit and for all units Mindanao Company was considering to manufacture or buy. Provide your comments explaining which alternative is more cost-effective and by how much?
  2. Now assume that 50% of Mindanao Company’s fixed overhead can be avoided if X component is purchased externally. Under this condition, calculate the relevant costs. Based on your quantitative and qualitative analysis, explain whether you would suggest Mindanao Company to manufacture X component in-hose or buy it externally.   
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