Q1

a) Shah Ltd needs a component for one of its products. It can subcontract production of the component to a subcontractor who will provide the components for $20 each. Shah Ltd can produce the components internally for total variable cost of $15 per component. Shah Ltd has spare capacity.

Required:

Should the component be subcontracted or produced internally? (2 marks)

b) Now assume that Shah Ltd has no spare capacity, so it can only produce the component internally by reducing its output of another of its products. While it is making each component, it will lose contributions of $12 from the other product.

Required:

Should the component be subcontracted or produced internally? (3 marks)

c) What factors, other than the immediately financially quantifiable, would you consider when making a make-or-buy decision? (3 marks)