a. The variable cost of manufacturing a component is Rs.5 calculated as follows Materials Rs.2.75 Labour Rs.1.75 Other variable costs Rs.0.50 Total Rs.5 The market price is Rs.5.75. This is more than the variable cost by Rs.0.75. It is therefore not profitable to procure from outside because in any case the fixed cost will continue to be incurred. However it the surplus capacity released on account of procuring the component from outside could be put to a more profitable use. It may be better to buy from outside rather than manufacturing the component Rs.4.85, there is saving of 15 paise in the variable cost too. Hence, it is profitable to procure from outside. The surplus capacity released may be put to some other profitable use. Problem No.2 Auto Parts Limited has an annual production of 90000 units for a motor component. The component's cost structure is as follows. Materials Rs.270 per unit Labour (25% fixed) Rs.180 per unit Variable Expenses Rs.90 per unit Fixed Expenses Rs. 135 per unit Total Rs.675 per unit a. The purchase manager has an offer from a supplier who is willing to supply the component at Rs.540. Should the component be purchased and production stopped? b. Assume the resources now used for this components manufacture are to be used to produce another new product for which the selling price is Rs.485/ In the latter case material price will be Rs.200 per unit. 90000 units of this product can be produced, at the same cost basis as above for labour and expenses. Discuss whether it would be advisable to divert the resources to manufacture that new product, on the footing that the component presently being produced would, instead of being produced, be purchased from the market