Suppose you have recently been contracted as a financial consultant to a London-

Question

Suppose you have recently been contracted as a financial consultant to a
London-based engineering company, Alpha Products Plc. The company uses
three components as part of their production process, namely, A, B and C.
The budgeted production output for the forthcoming year is to produce
10,000 of each of the three components.

The variable production cost per unit of the final product is as follows:

Only 112,000 hours of machine time will be available during the year, and a
sub-contractor has quoted the following unit prices for supplying the three
components: A £72.50; B £100 and C £88.

(a) Using the above financial data provide calculations which support your
advice to the company on whether it should produce the three components
or outsource them.
(b) Explain the use of the principle of opportunity cost and why costminimisation
and profit maximisation are compatible concepts and include a
table showing the total variable cost of your selected production or purchasing
plan.

Machine Hour Variable cost 1 Unit of A 6 65 1 Unit of B 4 90 1 Unit of C 8 60 Assembly 50 Total 265

Explanation / Answer

Statement hsowing ranking Particulars A B C Variable Cost of making                   65.00               90.00                       60.00 Cost of purchasing                   72.50             100.00                       88.00 Savings in producing                     7.50               10.00                       28.00 No of hours                     6.00                  4.00                         8.00 Savings per hour                     1.25                  2.50                         3.50 Ranking                     3.00                  2.00                         1.00 Now total hours available        112,000.00 Production of C (10000*8)          80,000.00 Hours available          32,000.00 Hours per unit of B                     4.00 Production of B             8,000.00 Purchase of B             2,000.00 Purchase of A          10,000.00 Statement hsowing Cost Particulars A B C No of units Produced                          -           8,000.00              10,000.00 Cost of producing per component               90.00                       60.00 Total cost of producing     720,000.00            600,000.00 No of units purchased          10,000.00         2,000.00 Cost of purchasing                   72.50             100.00 Total cost of Purchasing        725,000.00     200,000.00 Total Costs        725,000.00     920,000.00            600,000.00

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