Question

ToozeTooze

Limited manufactures air conditioning units. It needs Component A for one of its​ products, and can either manufacture them internally for variable costs of

​£281281

​each, or buy them in completed for

​£337337

each.

​Required:

1. Should

ToozeTooze

Limited manufacture or buy in Component​ A, assuming

ToozeTooze

Limited has spare manufacturing​ capacity?2. If

ToozeTooze

Limited did not have spare manufacturing​ capacity, but could only manufacture Component A by reducing output of Component B​ (each one of which currently contributes

​£7676​),

should

ToozeTooze

Limited manufacture or buy Component​ A?

​(Enter your answers as​ integers.)

Requirement 1

Variable costs to manufacture Component A are

▼

greater than

less than

the cost of buying in completed Component As by

​£nothing.

ToozeTooze

Limited should therefore

▼

manufacture the component

buy in the component

.

Requirement 2

If

ToozeTooze

Limited did not have spare​ capacity, the relevant cost of each Component A would​ be:

Variable cost of manufacturing Component A
Opportunity cost of lost production of Component B
Total relevant cost of internal production

The relevant costs of manufacturing Component A are

▼

greater than

less than

the cost of buying in completed Component As by

​£nothing.

ToozeTooze

Limited should therefore

▼

manufacture the component

buy in the component

.

Answer 1

Solution:-

1. Should ToozeTooze Limited manufacture or buy in Component​ A, assuming ToozeTooze Limited has spare manufacturing​ capacity:-

Variable costs to manufacture Component A are less than the cost of buying in completed Component As by ​£56,056.

ToozeTooze Limited should therefore manufacture the component.

2.

If ToozeTooze Limited did not have spare​ capacity, the relevant cost of each Component A would​ be:

Variable cost of manufacturing Component A 281,281 Opportunity cost of lost production of Component B 7,676 Total relevant cost of internal production 288,957

The relevant costs of manufacturing Component A are less than the cost of buying in completed Component As by

​£48,380 nothing.

ToozeTooze Limited should therefore manufacture the component.

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