AMA

AMA

4 0 . 5 Ordering cost per unit = ? 25 Question & A Company manufacturing agricultural machinery is preparing its budget for the year 1995. An initial review shows that it will not be possible to manufacture all requirements for components A, B, C and D because the normal metal pressing capacity of 20,000 hours would be exceeded. The company can choose between the alternative courses of action given below to obtain the products in excess of normal production capacity: (1) to pay entirely from outside suppliers, (U) to buy from outside suppliers and/or use a partial second shift. The data given below are for the year 1995: Standard Production cost per unit Components Variable costs Direct materials 11.50 22.00 Direct wages 5.DO 4.00 20.00 10.00 30.00 2.50 2.00 5150 10.00 31.00 34.00 82.00 2.000 3.500 1.500 Dre expenses 5.00 Faed overhead Total production cost 29.50 Requirements 2800 Direct expenses relate to the use of the metal presses, which cost 5 per machine hour to operate. Pued overhead is absorbed as a percentage of direct wages. Quotations obtained from outside suppliers indicate a willingness to manufacture all or any part of the total requirements at the following prices, each delivered to the factory. Components 30.00 29.50 26.00 84.00 od shift operations would increase direct wages costs by 25% over the normal shift ferd overhead by 250 for each 1,000 (or part thereof) second shift hours worked. You are ed using the information given above and showing your supporting calculations, tot YA Which components, and in what quantities, should be manufactured in the 20,000 hour of press time available! Whether it would be profitable to make any of the balance of components required on a second shift basis instead of buying them from outside suppliers? Answer: It may be pertinent to mention here that the marginal cost of component is more than its haught out price. Therefore, normally it would advisable to purchase it instead of manufacturing The company stands to gain by 0.48 per unit of component manufactured in second shift. Therefore, it should manufacture the balance possible 2900 units of component B in second shit dit (ICWA Final June 2000)