Question

      Q 3 Kadhim Co. manufactures product B which is a part of its main product. Kadhim Co makes 50,000 units of product B per year. The production costs are detailed below. An outside supplier has offered to supply 50,000 units of product B per year at $ 2.45 each. Fixed production cost of $ 40,000 associated with the product B are unavoidable. Should Kadhim Co make or buy the product B?

The production cost per unit for manufacturing a unit of product B are:

Direct Materials	0.85
Direct Labor	0.65
Variable Manufacturing Overhead	0.40

Answer 1

To take a decision on whether to make or buy the component part, fixed cost being irrelevant cost should not be added to the cost . Because these will be incurred even if the part is not produced. In the given question it clearly said that the fixed production cost associate with product B are unavoidable. Which means it's irrelevant with the production of part. therefore fixed cost should not be included.

The production cost per unit for contacting a unit of product B are:

Particulars. $ Dollars

Direct material. 0.85

Direct labour. 0.65

Variable manufacturing     0.40

Overhead. --------------

Total $ 1.9 each

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The company should manufacture the part If it is available in the market at $2.45 each. Because cost of producing the part is 1.9 which is lower than the purchase cost.