Hussain Corporation annually produces 10,000 units of assembly part number 206.

Question

Hussain Corporation annually produces 10,000 units of assembly part number 206. An outside supplier has offered to manufacture the part at Rs. 9 per unit. If Hussain Corporation decides to buy the part, they will be able to rent the existing area for Rs. 8,000 per year. Listed below are Hussain's total costs to produce part 206: Rs. Total ( Rs. ) Direct material 2.50 25.000 Direct Labor 4.00 40,000 Variable overhead 2.25 22,500 Fixed Overhead 0.75 7,500 Total 9.50 95,000 Assuming that no additional costs are incurred in purchasing the part. what should be the opportunity cost for Hussain Corporation if it will buy? Support your answer with computations.

Explanation / Answer

The total cost if the outside supplier is chosen: 10,000*9=90,000 The rent saved is 8,000 so taotal cost is 82,000 if hussain is manufacturing then he has to incur 95,000. so he should go for outside supplier. opportunity cost is Rs.13,000

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