PROBLEM 7 (MAKE OR BUY) A company at present has been buying a component called 'X', used in its finished product. Purchasing cost of component X is Rs. 10 per unit. The company has a normal capacity of 40,000 machine hours, and the budgeted fixed cost for the period is Rs. 1,60,000. The sales price of finished product is Rs. 100 per unit. The detailed manufacturing cost of one unit of finished product at normal capacity is as under: Direct Material (Including Component x) Rs. 50.00 Direct Labour (2 hrs. @ Rs. 8) Rs. 16.00 Manufacturing Overhead Cost (1 Machine hr. @ Rs. 10) Rs. 10.00 Total Rs. 76.00 Direct material cost of the company includes cost of four units of component X used in the finished product. The company has been considering to manufacture its own component X'. The product designing department has prepared the following estimation of cost of producing one unit of component X. Direct Material Rs.3.00 Direct Labour 0.25 DLH @ Rs. 8 Rs.2.00 Manufacturing Overhead 0.25 Machine Hours @ Rs. 10 Rs.2.50 Total Rs.7.50 The company has been able to utilize only 80% of its capacity in the past and it does not expect a change in the situation in future. Required: Differential cost analysis to see whether the company should make its own component 'X' or not if company suppose to increased its capacity to produced X. [Ans: Make save Rs. 2,88,000]