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A company manufactures a series of motor vehicle parts. The management of the company must decide whether part B2256 should be manufactured or purchased
A company manufactures a series of motor vehicle parts. The management of the company must decide whether part B2256 should be manufactured or purchased from another manufacturer. The demand is 10 000 units per annum. The following cost information regarding the 10 000 units is available: Option 1 - Manufacture Direct material - R20 000 Direct labour R50 000 Variable overheads - R25 000 Fixed overheads R10 000 Additional information: There is enough capacity in the factory to manufacture these additional 10 000 units of part B2256. Option 2 - Purchase Fixed overheads R10 000 Purchase price of part B2256 - R11.00 per unit Additional information: If the product is going to be purchased, the vacant capacity of the factory will be leased to another company for R5 000 per annum. Required: Show all calculations. 1.1. Explain the meaning of the term "non-relevant cost". 1.2. Calculate the total costs for option 1 manufacture 10 000 units. 1.3. Calculate the total costs for option 2 purchase 10 000 units. Advise management whether they should manufacture or purchase part B2256. 1.4.
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