Kaustubh Ltd. company manufactures component Q, one unit of which is required for each unit of...

 

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Kaustubh Ltd. company manufactures component Q, one unit of which is required for each unit of Product K. The budgeted output of K is 1,20,000 units. The cost details for 10,000 units of component Q are as under: Direct Materials Direct labour @ 15 per hour Variable overheads Fixed overheads 72,000 90,000 54,000 54,000 The component Q's unit price is 24 in the market. If the company decides to purchase the component Q from the market, it has the following two options for the capacity so released: (1) (ii) Rent out the released capacity at * 3 Per hour. Manufacture another component, Alpha, which can be sold at * 24 per unit in the market. The cost details of this component for 10,000 units are as follows: Direct Materials Direct labour@* 15 per hour Variable overheads 90,000 45,000 90,000 Required: (a) Evaluate the two options available for the use of spare capacity and recommend whether the company should manufacture or buy the component Q. If your recommendation is in favour of buying the component Q from the market, which of the two options you will prefer? (b) In case, no alternative use of the spare capacity is there, whether the company should make the component Q in the factory or purchase it from the market? Give proper workings to justify your recommendation. Kaustubh Ltd. company manufactures component Q, one unit of which is required for each unit of Product K. The budgeted output of K is 1,20,000 units. The cost details for 10,000 units of component Q are as under: Direct Materials Direct labour @ 15 per hour Variable overheads Fixed overheads 72,000 90,000 54,000 54,000 The component Q's unit price is 24 in the market. If the company decides to purchase the component Q from the market, it has the following two options for the capacity so released: (1) (ii) Rent out the released capacity at * 3 Per hour. Manufacture another component, Alpha, which can be sold at * 24 per unit in the market. The cost details of this component for 10,000 units are as follows: Direct Materials Direct labour@* 15 per hour Variable overheads 90,000 45,000 90,000 Required: (a) Evaluate the two options available for the use of spare capacity and recommend whether the company should manufacture or buy the component Q. If your recommendation is in favour of buying the component Q from the market, which of the two options you will prefer? (b) In case, no alternative use of the spare capacity is there, whether the company should make the component Q in the factory or purchase it from the market? Give proper workings to justify your recommendation.

Answer rating: 100% (QA)

Lets solve this stepbystep a Evaluation of options available for spare capacity Option 1 Rent out ca... View the full answer