QUESTION 2

The Managing Director (MD) of your company is in some dilemma regarding an advice from the Production Manager, on whether to make or buy a certain product.

Required:

1. Discuss the purpose of a make versus buy exercise and detail how this purpose may be achieved. (5 Marks)
2. The company manufactures and sells three components, but has requested its purchasing manager to investigate the prices of an overseas producer. The following costs and prices are made available:

Component Y Production (units) 40,000 K/unit Direct material cost 1.00 0.40 Direct labour cost 1.80 0.80 Direct expense cost 0.60 0.20 Fixed cost 1.00 0.40 Selling price 5.00 2.00 Imported price 2.75 4.20 2.00 (i) Make your recommendation to management as to whether any component should be purchased on the basis cost only. (10 Marks) (ii) What profit will the company make by producing all the components itself? (10 Marks) Component X 20,000 K/unit 0.80 1.60 0.40 0.80 4.00 Component Z 80,000 K/unit