PROBLEM 10 (MAKE OR BUY) A Company at present is buying a component AA using its final product. The annual need of the company is 50,000 units and the purchase price per unit is Rs. 50. The cost of producing one unit of finished product are: Direct material cost including one unit of component is Rs.60. The direct labour cost per unit is Rs.40. The variable manufacturing cost per unit is Rs.20 and the annual fixed cost is Rs.200,000. The sales unit is 50,000 units. The selling price of the product is Rs.200. The company is considering to manufacture its own component. The cost estimate for production of one unit of component are as follows:

Material Cost Rs. 30

Labour Cost Rs. 15

Variable Manufacturing Cost Rs. 10

Fixed Manufacturing Cost Rs.5

Total Rs 60

The company has enough unutilized capacity. Required: Should the Company Manufacture the Component? (Differential Cost Statement is Compulsory).

[Ans: Buy-save cost or increased profit by Rs. 2,50,000]