MAKE OR BUY/ KEEP OR REPLACE
QUESTION1:
An Automobile manufacturing company finds that the cost ofmaking a component part in its own working shop is N$ 50. The same part is available in the market at N$48 with an assurance of continuous supply. The cost data to make the part are:
Material N$ 20
Direct labor N$ 22
Other variable cost N$ 4
Fixed cost N$ 4
N$ 50
Requirement:
a) Should the part be made or bought?
b) Will the answer be different if the market price is N$45?
Show your calculations clearly
QUSTION 2:
Carols cupcakes sells cupcakes and other desserts through its retail store. The company has always made its ingredient from the scratch but recently has been approached by a supplier that specializes in icing.
Carol believes that the suppliers icing is of equal quality to her own and believe the offer of N$3.00 may enable her to save money. Carol is evaluating her own cost of producing icing:
| | |
Direct Material Direct Labor Variable manufacturing overhead Fixed Manufacturing overhead-traceable* Fixed manufacturing overhead allocation Total *40%relates to cleaning and maintenance of the icing equipment and 60% relates to depreciations of icing equipment(with no resale value) | 1.00 0.50 0.25 1.00 1.75 4.50 | 5,000 2,500 1,250 5,000 8,750 22,500 |
Examining the report Carol says, Their acing is just as good and it will serve me N$1.50 per litre thats over N$7,500 for the year. I think Im going to take the deal.
Required:
a) Assume that there is no any other use of icing equipment or the space used in the kitchen, what is the net dollar advantage or disadvantage of accepting the suppliers offer
b) If the offer is accepted carol cupcakes could use the space that had been previously used for making icing as a bacon-frying space. Carol believes that a new bacon line of cupcakes would produce margins of N$5,000 per year. Should Carols Cupcakesaccept the suppliers officer?
