Question

34. Component “X” is manufactured in the machine shop. The annual requirement of the component is 10,000 units. If it is bought out, the lowest quotation from an outside supplier is Rs. 8.00 per unit. The following expenses of the Machine shop apply to manufacturing of component “X”: Materials Rs. 35,000; Labour Rs. 56,000; Indirect Labour Rs. 12,000; Power and Fuel Rs. 600; Repairs and Maintenance Rs. 1,000; the sale of Machinery used for manufacture of the component “X” would reduce depreciation by Rs. 4,000 and Insurance by Rs. 2,000; If component X is bought out the following additional expenses are incurred: Freight Rs. 1.00 per unit, Inspection Rs. 10,000 per annum; You are required to prepare a report to the Managing Director showing the comparison of expenses to Machine shop when (i) component X is made and (ii) when bought out.

Answer 1

Cost for making Component X is

Manufacturing exp	Rs.
Materials	35000
Direct Labour	56000
Indirect labour	12000
Power and fuel	600
Repairs and maintenance	1000
Total cost		104600

Cost per unit for making the product is Rs. 10.46

Cost for buying the component from outside is

	Rs
Cost to buy from outside	80000
Freight	10000
Inspection	10000
	100000
Less cost savings
Depreciation	-4000
Insurance	-2000
Total cost	94000

Cost per unit for buying the component from outside is Rs. 9.40.

So it is better to buy from outside as the unit cost is less for buying than making.

But due consideration should be given to the quality of the goods that is bought is par with the items that is manufactured. And the availability of components in future at the same price also should be enusred before taking a decision to buy from outside.