Intermediate: Make or buy decision and limiting factors A company is preparing its production budget for the year ahead.

Two of its processes are concerned with the manufacture of three components which are used in several of the company's products.

Capacity (machine hours) in each of these two processes is limited to 2000 hours.

Production costs are as follows:

Requirements for components X, Y and Z for the following year are:

Fixed overhead is absorbed on the basis of machine hours at the following rates:

Components X and Z could be obtained from an outside supplier at the following prices:

Required:

(a) Demonstrate that insufficient capacity is available to produce the requirements for components X, Y and Z in the year ahead, and calculate the extent of the shortfall.
(6 marks)

(b) Determine the requirements for bought-in components in order to saUsfy the demand for components at minimum cost. (8 marks)

(c) Consider briefly any other factors which may be relevant to decisions regarding these components in the longer term.

Transcribed Image Text:

Component X Component Y Component Z ( per unit) ( per unit) ( per unit) Direct materials 15.00 18.50 4.50 Direct labour 12.00 12.50 8.00 Variable overhead 6.00 6.25 4.00 Fixed overhead Process M 6.00 6.00 4.50 Process N 10.50 10.50 3.50 49.50 53.75 24.50