QUESTION 5

Black Stars produces a brand of tricycles for the local agricultural industry of Begoro. The following are the total processing costs for each unit of tricycle:

Fixed cost Variable overhead Direct material Direct labour

GHS 12,500 3,000 1,250 2,000

The same units are available in the local market. The purchase price of the component is GHS5,500 per unit. The fixed overhead would continue to be incurred even when the component is bought from outside, although there would be reduction to the extent of GHS500 per unit. However, this reduction does not occur, if the machinery is rented out.

Required:

a. Should the part be made or bought, considering that the present capacity when released would remain idle?

b. In case, the released capacity can be rented out to another manufacturer for GHS1,125 per unit, what should be the decision?