MULTIPLE CHOICE QUESTION PRACTICE:

Which FOUR of the following are to be correctly included in considerations in a make or buy decision?

(i) The amount of re-allocated rent costs caused by using the production space differently. (ii) The variable costs of purchase from the new supplier.

(iii) The level of discount available from the new supplier.

(iv) The redundancy payments to supervisor of the product in question.

(v) The saved labour costs of production staff re-directed to other work.

(vi) The material no longer bought to manufacture the product.

2. P is considering whether to continue making a component or to but it from an outside supplier. It uses 12,000 of components each year. The internal manufacturing cost comprises:

/unit

Direct material 3.00

Direct Labour 4.00

Variable Overheads 1.00

Specific fixed cost 2.50

Other fixed expenses 02.00

Total 12.50

If the direct labour were not used to manufacture the components, it would be used to increase the production of other item for which there is unlimited demand. This other item has a contribution of 10.00 per unit but requires 8 of labour per unit. What is the maximum price per component, at which buying is preferable to internal manufacture?

A. 8.00

B. 10.50

C. 12.50

D. 15.50

3. A company makes and sells product X and product Y. Twice as many units of product Y are made and sold as that of product X. Each unit product X makes a contribution of 10 and each unit of product Y makes a contribution of 4. Fixed costs are 90,000. What is the total number of units which must be made and sold to make a profit of 45,000?

A. 7,500

B. 22,500

C. 15,000

D. 16,875

4. Betis Limited is considering changing the way it is structured by asking its employed staff to become freelance. Employees are currently paid a fixed salary of 240,000 per annum, but would instead be paid 200 per working day. On a typical working day, staff can produce 40 units. Other fixed costs are 400,000 per annum. The selling price of a unit is 60 and material costs are 20 per unit.

Which will be the effect of the change on the breakeven point of the business and the level of operating risks?

A. The breakeven point reduces by 6,000 units and the operating risk goes down.

B. The breakeven point reduces by 4,571 units and the operating risk goes down.

C. The breakeven point reduces by 4,571 units and the operating risk goes up.

D. The breakeven point reduces by 6,000 units and the operating risk goes up.