Question

Jubran Co. manufactures product A which is a part of its main product. Jubran Co makes 50,000 units of product A per year. The production costs are detailed below. An outside supplier has offered to supply 50,000 units of product A per year at $ 2.45 each. Fixed production cost of $ 40,000 associated with the product A are unavoidable. Should Jubran Co make or buy the product A? The production cost per unit for manufacturing a unit of product A are: Direct Materials 0.85 Direct Labor 0.65 Variable Manufacturing Overhead 0.40

Answer 1

COST PAID TO OUTSIDE SUPPLIER=50000*$2.45

                                                     =$122500

COST OF PRODUCING 50000 UNITS OF PRODUCT A

=DIRECT MATERIAL+DIRECT LABOUR + VARIABLE MANUFACTURING OVERHEAD

=50000(0.85+0.65+0.40)

=$95000

NOTE: FIXED COST IS NOT CONSIDERED IN ABOVE CALCULATION AS IT WILL BE INCURRED EVEN IF GOODS ARE TAKEN FROM OUTSIDE SUPPLIER.

THUS JURBAN CO SHALL MAKE THE PRODUCT INSTEAD OF BUYING IT FROM OUTSIDE SUPPLIER AS IT WILL INCUR LESS COST COMPARATIVELY.IT WILL GET PROFITED BY $27500(122500-95000)