Question

In: Accounting

a) Ghana Agro Food Processing Company Limited has spare capacity to process poultry feed and is...

a) Ghana Agro Food Processing Company Limited has spare capacity to process poultry feed and
is considering offering a service to the Greater Accra Poultry Farmers Association. To aid
deliberations concerned with what rate should be quoted when offering the service, the Poultry
Manager has asked for your assistance in analysing the Poultry department’s fixed and variable
costs.
From her departmental records, the poultry manager has extracted the following schedule of
cost information.
Month poultry
costs
Metric tons (MT) of
poultry feed processed
GH¢’000
July 22,000 20,000
August 21,600 19,500
September 21,800 19,750
October 20,800 18,500
November 20,720 18,400
December 20,400 18,000
Required:
i. Use the high–low method to determine the poultry department’s fixed and variable cost
structures.
ii. Provide an estimate of the total cost if 25,000 metric tons of poultry feed were processed in a
month.

b) Explain the concept of ‘Make-or-Buy Decisions’ and justify the factors that drive contracting
decisions. ( 12 marks)

Solutions

Expert Solution

a.)
i) High Low method
Variable cost                     1,250 GH¢ per MT ( 20,000,000 - 18,000,000 ) / ( 22,000 - 20,400)
or
Variable cost                       1.25 GH¢’000 per MT
Fixed Cost        172,500,000 GH¢ (20,000,000 - ( 22,000 x 1,250 ) )
or
Fixed Cost                172,500 GH¢’000
ii) Total Cost at 25,000 MT
Amount in GH¢
Fixed Cost        172,500,000
Add: Variable Cost          31,250,000 (25,000 x 1,250 )
Total Cost       203,750,000
or
Total Cost                203,750 GH¢’000

b.) Concept of make or buy decisions:-

The make or buy decision is the act of making a strategic choice between producing an item within the organization or purchasing it from external source.Make or buy decision arises when a company has developed a product or part is having trouble with current supplier or has dimishing capacity.

Factors that drive the decision of make or buy includes :-

a. ) Size of the company influence the decison of make or buy,

b.) Difficulties in manufacturing the goods in house

c.) Capacity limitation for production in case of excess demand

d.) Quality of goods


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