Alfa Beta manufacturing company has sufficient idle capacity therefore, it would like to see the possibility of manufacturing a component used in its…
2024 · Solved Question with Answer
Alfa Beta manufacturing company has sufficient idle capacity therefore, it would like to see the possibility of manufacturing a component used in its final products. The company has been buying the component from an outside supplier at the rate of Rs.120 per unit. The other data have been given below:
| Annual needed / Production units | 20,000 units |
| Estimated cost for one unit of output: | |
| Direct material cost per unit | Rs 50 |
| Direct labour cost per unit | Rs 30 |
| Manufacturing overheads per unit | Rs 20 |
The company has followed a system of defining its plant capacity in terms of direct labour hours. The normal capacity is 50,000 DLH. The annual budgeted fixed manufacturing overhead is Rs 400,000. One unit of output requires two direct labour hours.
Required: Differential cost analysis to decide whether the company should continue to buy the component.