Question 4: Make or Buy

Albax Ltd manufactures three components (A, B and C) All the components are manufactured using the same general purpose machinery. The following production cost data are available, together with the purchase prices from an outside supplier.

Production cost:

Direct material

Direct labour

Variable overhead Allocated fixed overhead Total

Purchase price from outside supplier

Required:

ABC GH GH GH 14 20 10 24 13 12

8 7 8

9 6 4

55 46 34

54 50 28

a. Which components should be purchased from outside supplier?

b. If machine hours per unit of A, B and C are 2, 5 and 4 respectively and manufacturing

requirements show a need of 1,500 units of each component per week and maximum number of general purpose machinery hours available per week is 15,000, what should be purchased from outside supplier?