Q1) ABC Ltd. Produces room coolers. The company is considering whether it should continue to

manufacture air circulating fans itself or purchase them from outside. Its annual requirement is

25000 units. An outsider vendor is prepared to supply fans for Rs 285 each. In addition, ABC Ltd

will have to incur costs of Rs 1.50 per unit for freight and Rs 10,000 per year for quality inspection,

storing etc of the product.

{25 Marks }

In the most recent year ABC Ltd. Produced 25000 fans at the following total cost :

Material Rs. 50,00,000

Labour Rs. 20,00,000

Supervision & other indirect labour Rs. 2,00,000

Power and Light Rs. 50,000

Depreciation Rs. 20,000

Factory Rent Rs. 5,000

Supplies Rs. 75,000

Power and light includes Rs 20,000 for general heating and lighting, which is an allocation based on

the light points. Indirect labour is attributed mainly to the manufacturing of fans. About 75% of it

can be dispensed with along with direct labour if manufacturing is discontinued. However, the

supervisor who receives annual salary of Rs 75,000 will have to be retained. The machines used for

manufacturing fans which have a book value of Rs 3,00,000 can be sold for Rs 1,25,000 and the

amount realized can be invested at 15% return. Factory rent is allocated on the basis of area, and the

company is not able to see an alternative use for the space which would be released. Should ABC

Ltd. Manufacture the fans or buy them?