Question

Grand Limited currently produces a component of a product with the following per unit production costs:

Direct materials	$18
Direct labour	31
Overhead	18
Total production costs	$67

Grand Ltd. currently manufactures these components in-house, averaging production of 29020 units each year. A supplier has approached the company offering to supply 29020 units each year at a cost of $48 each.

60% of the overhead is fixed and if Grand Ltd. purchases the components, then 1/3 of the fixed overhead costs would be avoidable.

What is Grand’s net advantage to buying the component from the supplier?

Select one:

a. $342436

b. There is no advantage from buying it from the supplier.

c. $203140

d. $237964

Answer 1

Solution :

The Answer is (a) $342,436.

Working :

Particulars	Make	Buy
(a) Units	29,020	29,020
(b) Direct Material (29,020 * $ 18)	$ 522,360
(c) Direct Labor (29,020 * $ 31)	$ 899,620
(d) Variable OH ($ 18 * 40% * 29020)	$ 208,944
(e) Avoidable Fixed Costs ($ 18 * 60% * 1/3 * 29,020)	$ 104,472
(f) Buying Costs (29,020 * $ 48)		$ 1,392,960
(g) Total Costs (b + c + d + e + f)	$ 1,735,396	$ 1,392,960

Benefit in Buying from Outside = $ 1,735,396 - $ 1,392,960

= $ 342,436.

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