The Managing Director of your company seeks your advise in arriving at a decision whether to continue manufacturing a component or to buy it from outside. The component is used in several of company’s products. The following information is available :
(i)The annual requirement is 40,000 units.
(ii)The lowest price quotation from a supplier was Rs. 27.50 per unit.
(iii)The costs incurred last year when 40,000 components were produced is as under : Material Rs. 12,00,000; Labor (direct) Rs. 15,00,00; Indirect Labor
Rs. 4,00,000; Light and Heat Rs. 80,000; Power Rs. 1,20,000; Depreciation Rs. 7,00,000; Property Taxes and Insurance Rs. 70,000; Miscellaneous Expenses Rs. 1,50,000.
(iv)The following proportion of the variable costs could be avoided if production of the component is discontinued. Materials 35 % , direct labor 40 % and Power 25 %.
If the component is purchased from an outside supplier, average freight cost will be Re. 0.50 per unit. Also Indirect Labor would increase by Rs. 30,000 on account of receiving, handling and inspecting the purchased parts. Advise the management