Question

The management of James Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A R200 cost per component has been determined as follows:

R
Direct materials 15
Direct labour 40
Variable manufacturing overhead 10
Fixed manufacturing overhead 35
Total 100

James Industries uses 4000 components per year. After Light SA has submitted a bid of R80 per component, some members of management feet they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Light SA, James's unused production facilities could be leased to another company for R50 000 per year.

Required:
a. Determine the maximum amount per unit James should pay an outside supplier.
b. Indicate whether the company should make or buy the component and the total monetary difference in favour of that alternative.
c. Assume the company could eliminate production supervisors with salaries totalling R30 000 if the component were purchased from an outside supplier. Indicate whether the company should make or buy the component and the total monetary difference in favour of that alternative.

Answer 1