Q 43

Tabri makes two component, A and B, for which costs in the next year are expected to be as follows:

A B

Production (units) 30,000 20,000

Variables costs per unit: GHS GHS

Direct materials 6 5

Direct labour 3 9

Variable production overheads 1 3

Variable production cost 10 17

Direct labour is paid GHS12 per hour. There will be only 19,500 hours of direct labour time available next year, and any additional components must be purchased from an external supplier.

Total fixed costs per annum are expected to br as follows:

GHS

Incurred as a direct consequence of making A 40,000

Incurred as a direct consequence of making B 50,000

Other fixed costs 30,000

120,000

An external supplier has offered to supply units of A and for GHS12.5 and units of B for GHS23

Required:

a) Recommend whether Tabri should shut down internal production of component A or component B and switch to external purchasing

b) Recommend the quantities that Tabri should make of the component and the quantities that it should buy externally, in order to obtain the required quantities of both component at the minimum cost. Calculate what the total annual cost will be

NB: To answer part (b), you will need to consider that labour is a limiting factor