Exam (elaborations)
Make and Buy Examples
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Make and Buy example, with solutions and detailed explanations. Based on past paper questions.
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darceys
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2) Company ‘Z’ produces a component in a dedicated department, 1,000 units are produced a year. The unitary costs areas followed:
Direct Material €50
Direct Labour €80
Machinery Depreciation €40
Machinery Power (variable part) €20
Industrial General Overhead €30
TOTAL UNITARY COST €220
Company ‘Y’ offers the same component at a unitary price of €170. Having the information as followed, would it be
economically convenient for company ‘Z’ for accept ‘Y’s offer?
- machineries used are not employable in other productions, nor sellable (useful residual life: 4 years)
- machinery used has a counter measuring the amount of power used
- direct labour can be employed in other departments
Solution:
MAKE (ceasing) BUY (raising)
COST TO BUY €170
DIRECT MATERIAL €50
DIRECT LABOUR €80
MACHINERY POWER €20
TOTALS €150 €170
As the cost to make is less than the cost to buy, it is more convenient to MAKE.
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