Exam (elaborations)
Make or Buy Example
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Make and Buy example, with solutions and detailed explanations. Based on past paper question.
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Make or Buy examples:The first of these examples is more difficult than the second, however the explanation is more in depth.
1) ‘Chocolate’ company produces a component whose volume is equal to 2000 units per year. Total costs have been
collected and are as followed:
Raw Materials $35,000
Direct Labour (3 operative workers) $60,000
Indirect Employee (supervisor/manager) $30,000
Machine Depreciation $25,000
Machine Energy Consumption $7,000
Administrative expenses allocated to department $11,000
TOTAL ANNUAL COSTS $168,000
‘Vanilla’ company produces the same component at a price of $60 per unit. Knowing that in the case of outsourcing:
- cost assumption: the 3 operative workers are paid the same ($20000 each)
- worker 1 can not be moved to another department
- worker 2 can obtain the ‘unemployment insurance’
- worker 3 and the supervisor can be moved to another department with a part-time contract at a 50% level of their
current salaries
- the machinery can no be moved to another department nor can be sold
- with the resources let free due to outsourcing, the company can obtain an incremental annual margin of $10000
Would you suggest to the administrator to continue to make the component or to outsource its production?
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