Intermediate: Make or buy decisions and limiting factors The management of Alliance Engineering & Manufacturing Company Limited
Question:
Intermediate: Make or buy decisions and limiting factors The management of Alliance Engineering & Manufacturing Company Limited produce a range of components and products.
They are considering next year's production. purchases and sales budgets. Shown below are the budgeted total unit costs for two of the components and two of the products manufactured by the company.
Components 12 and 14 are incorporated into other products manufactured and sold by the company, but they are not incorporated into the two products shown above.
It is possible to purchase components 12 and 14 from other companies for £60 per unit and £30 per unit respectively.
The current selling prices of products VW and XV are £33 and £85 respectively.
You are required to:
(a) Evaluate, clearly indicating all the assumptions you make as to whether it would be profitable in the year ahead for the company to:
(i) purchase either of the components;
(ii) sell either of the above products. (12 marks)
(b) Prepare statements for management with supporting explanations as to how the following additional Information would affect your evaluation in
(a) above if next year's production requirements for the two components are 7000 units of component 12 and 6000 units of component 14 and the budgeted sales for the two products VW and XY are 5000 units and 4000 units respectively when a special machine, a MAC, is required.
The MAC machine is needed exclusively for these two components and two products because of specific customer requirements but for technical reasons the machine can only be used for a maximum of 80000 hours in the year.
The budgeted MAC machine usage for any one year is 80 000 hours and requirements per unit for the various items are as follows:
The operating costs of the MAC machine have been included in the unit costs shown in
(a) above.
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