Question

BAF Ltd produces and sells to wholesalers various kinds of office stationery. The company is planning to introduce one new product for this coming summer. The new product is a newly designed stapler. The product will be sold to wholesalers in batches of 20 for $9 each. The capacity is available so no additional fixed costs in this will be incurred to produce the new product. Instead, a $190,000 fixed fee will be assigned to allocate a fair share of the company’s fixed costs to the new product. The remaining overheads are variable.

The new product is made of a number of parts and components which can be made internally. Using estimated sales and production of 100,000 batches of the new product as the standard volume, the following costs per batch of 20 staplers are developed:

Direct materials                       $7

Direct labor                              $4

Total overheads                      $3

The company is negotiating with a supplier about the possibility of purchasing one of the parts, Part X, for the new product. The supplier quotes a purchase price of $2 per 20 units of Part X. If the company accepts and purchases this part from the supplier, it is estimated the direct labor cost and variable overheads would be reduced by 10 percent and direct materials costs would be reduced by 20 percent.

Decisions are to be made based on financial effects only.

A.      Should BAF Ltd make or buy Part X? Support your answer with calculations.

                                                                                                                                                            

B.      What would be the maximum purchase price per unit of Part X acceptable to BAF Ltd?

                                                                                                                                                            

C.      BAF Ltd is changing the estimates to have a sales volume at 130,000 units of the new product. Additional machine is needed to produce more units of Part X and the annual rental is $16,000. The additional machine can produce up to 200,000 units of Part X. Should BAF Ltd make or buy Part X? Support your answer with calculations.

                                                                                                                                                            

D.      BAF Ltd is changing the estimates to have a sales volume at 130,000 units of new product. Additional machine is needed to produce more units of Part X and the annual rental is $16,000. The additional machine can produce up to 200,000 units of Part X. BAF Ltd has an additional option to make some and buy the rest of Part X. Hence, the company now has two options available so that the total cost in relation to the new product must be minimized: (a) make as many units of Part X as possible and buy the rest; (b) buy all units of Part X.

Which option, (a) or (b), should BAF Ltd select? Support your answer with calculations.             

                                                                                                                                

Answer 1

ANSWER:

A) The Purchase price of X from supplier = $2 per batch

The Total cost that will incurred to produce x internally = Direct material + Direct labor + Variable overhead

Total over head incurred for Product stapler Per batch =$3

The Total Fixed overhead per batch = 190,000/100,000

=$1.9 per unit

The variable over head stapler per batch = 3 - 1.9

= $1,1 per batch

When the Component X purchase internally The Direct material 20% and Direct labor and Variable overhead will be reduced 10% Respectivly

That means The total cost will incurred to produce componet x Will be =(7*20%)+(1,1*10%)+(4*10%)

=1.4+0.11+0.4

=$1.91

  Statement of total cost of producing component x as follows;

Particulars	Amount ($)
Variable overhead cost	0.11
Direct labor	0.4
Direct material	1.4
Total cost for producing product X Internally	1.91

Total cost of producing x in internally less than buying from supplier

DECESION :BAF LTD SHOULD MAKE PART X

B) maximum purchase price per unit of Part X acceptable to BAF Ltd = Cost of production of Part x internally

   maximum purchase price per unit of Part X acceptable to BAF Ltd= $1.91 per batch

C) Assuming one unit of x needed to produce Stapler

So 130,000 batches of stapler needed 130000 batches of part X

So The number of units of Part x required to produce additional 30,000 batches

=30,0000*20

=600,000 units

But the Machine (additional machine ) Can produce up to 200,000 units nothing but 10,000 batches

The question is to whether company buy or make these 10,000 batches

The Total cost to produce x= $1.91 *10,000

=$19,100

Additional fixed cost = $16000

Total cost of producing additional batches = 19100+16000

=$35100

Total cost of buying outside = 10000*2

=$20,000

CONCLUSION : THE COMPANY SHOULD BUY PART X FROM OUTSIDE FOR ADDITIONAL VOLUME

D)

The Company has 2 option

A)make as many units of Part X as possible and buy the rest;

B)Buy all units of Part X.

ANALYSING OPTION A

Company can produce 100,000 batched Plus 10,000 batches additionally with the help of Additional machine and Rest 20,000 Batches can Buy from outside

Please refer below statement

Particulars	Amount($)
Producing first 100,000 batches of X	1,91,000
Producing additional 10,000 Batches	35,100
Buying 20,000 Batches from Outside	40,000
Total Cost	2,66,100

  

ANALYSING OPTION B

Total buying cost of all 130,000 batches from outside = 130,000*2

=$260,0000

CONCLUSION : OPTION B SHOULD BE SELECTED

THE TOTAL BUYING COST OF 130,000 BATCHES FROM OUTSIDE LESS THAN TOTAL COST OF OPTION A ABOVE

SO COMPANY SHOULD BUY ALL BATCHES OF PART X FROM OUTSIDE