Question Tag: Make or buy decision

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  • 20 Marks

PM – Nov 2021 – L2 – Q2 – Decision-Making Techniques

Determine whether to outsource production, calculate indifference price, and evaluate non-financial factors for internal production.

Divine Grace (DG) Limited currently produces “Part-2011” internally but has received an offer from KK Plc to outsource the production. The offer is for 1,000 units at N100 per unit for the next five years. The cost accountant provides the following cost breakdown for internal production of 1,000 units:

Cost Components Amount (₦)
Direct materials 44,000
Direct production labour 22,000
Variable production overhead 14,000
Depreciation on machine 20,000
Product and process engineering 8,000
Rent 4,000
General overheads 10,000
Total 122,000

Additional information:

  1. The machine used exclusively for “Part 2011” was acquired last year for ₦120,000 and has a useful life of six years with no residual value.
  2. The machine could be sold today for ₦30,000.
  3. Product and process engineering costs will cease after one year if outsourced.
  4. Rent savings from storage use if “Part-2011” production stops is ₦2,000.
  5. General overheads are fixed and not allocated to “Part-2011” if outsourced.
  6. Assume a required rate of return of 12%.

Required:
a. Should DG Limited outsource “Part 2011”? (10 Marks)
b. What maximum price should KK Plc quote for 1,000 units to make DG indifferent between outsourcing and internal production? (5 Marks)
c. What non-financial factors would favor internal production over outsourcing? (5 Marks)

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  • 10 Marks

BMF – Nov 2023 – L1 – SB – Q5a – Basics of Business Finance and Financial Markets

Discuss non-financial considerations in make-or-buy decisions

Managers think about non-financial issues as well as financial issues when making outsourcing decisions.

i. Explain SIX non-financial considerations that will be relevant to a make-or-buy decision. (6 Marks)

ii. Describe with the aid of an example in each case, two non-financial benefits from outsourcing work to an external supplier. (4 Marks)

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  • 20 Marks

MI – May 2017 – L1 – SB – Q3 – Decision-Making Techniques

Evaluate whether to continue outsourcing or manufacture in-house using cost analysis.

SEAGULL FABRICATORS LIMITED buys a component for N280 per unit, 6,000 units of which it uses monthly. Below is the cost of making the same component in-house:

UNIT COST (N) TOTAL COST (N)
Direct Material 100 600,000
Direct Labour 100 600,000
Variable Overheads 50 300,000
Total 250 1,500,000

To be able to fabricate the component, the company needs to purchase a mould for N5,000,000 with an expected life span of five years. Also, an annual rent of N1,000,000 needs to be paid for the space needed for the fabrication. Power consumption is also expected to increase by N500,000 per year.

Required:

a. You are required to advise the company whether to discontinue the outsourcing of the component or commence local fabrication. (8 Marks)

bi. State THREE qualitative factors to be taken into consideration before a decision is taken to outsource a component hitherto fabricated in-house. (6 Marks)

ii. List THREE quantitative factors usually considered in the case referred to in (bi) above. (6 Marks)

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  • 20 Marks

MA – Mar 2024 – L2 – Q5 – Relevant cost and revenue | Decision making techniques

This question determines the optimal units for in-house production versus outsourcing based on machine hour constraints and relevant cost analysis.

Hwerema Technologies produces various components for telecom companies. The demand for these components is increasing. However, Hwerema Technologies’ production facility is restricted to 50,000 machine hours. Therefore, the company is considering whether to import certain components to make up for the shortfall in production to meet market demand. In this respect, the following information has been gathered:

Factory overheads include fixed overheads estimated at GH¢1.50 per machine hour.

Required:
a) Determine the optimal units to be produced in-house and units to be imported. (16 marks)
b) State FOUR (4) qualitative considerations relevant to make-or-buy decisions. (4 marks)

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  • 20 Marks

MA – May 2021 – L2 – Q5b – Decision making techniques, Budgetary control

Recommend the quantities Agrow Ltd should produce in-house and purchase externally, along with the total annual cost.

Agrow Ltd is a community company that manufactures and sells car components; Wiper, Driving mirror, and Brake pad. The budgeted information for the next year is expected to be as follows:

WIPERS DRIVING MIRROR BRAKE PAD
Production (units) 50,000 25,000 35,000
GH¢ GH¢ GH¢ GH¢
Selling price per unit 34 30 28
Direct material per unit 9 10 5
Direct labour cost per unit 18 3 12
Variable production overhead 1 2 1

Direct labour is paid at GH¢12 per hour. While other production factors are unlimited, labour is limited to 102,500 hours. Hence, an extra component must be purchased from an external supplier.

Total fixed cost per annum is expected to be as follows:

Cost GH¢
Incurred as a direct consequence of making any quantity of Wiper 140,000
Incurred as a direct consequence of making any quantity of Driving mirror 255,000
Incurred as a direct consequence of making any quantity of Brake pad 150,000
Other Fixed Cost 60,000
Total Fixed Cost 605,000

An external supplier has offered to supply a unit of the following at their respective prices:

Component GH¢
Wiper 32
Driving mirror 24
Brake pad 23

Required:

a) Advise which of the products Agrow Ltd should make in-house or outsource. (7 marks)

b) Recommend the quantities that Agrow Ltd should make and the quantities it should buy externally to obtain the required quantities of all the parts and calculate the total annual cost. (10 marks)

c) State THREE (3) factors to consider before setting a selling price of a product. (3 marks)

(Total: 20 marks)

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  • 20 Marks

PM – Nov 2021 – L2 – Q2 – Decision-Making Techniques

Determine whether to outsource production, calculate indifference price, and evaluate non-financial factors for internal production.

Divine Grace (DG) Limited currently produces “Part-2011” internally but has received an offer from KK Plc to outsource the production. The offer is for 1,000 units at N100 per unit for the next five years. The cost accountant provides the following cost breakdown for internal production of 1,000 units:

Cost Components Amount (₦)
Direct materials 44,000
Direct production labour 22,000
Variable production overhead 14,000
Depreciation on machine 20,000
Product and process engineering 8,000
Rent 4,000
General overheads 10,000
Total 122,000

Additional information:

  1. The machine used exclusively for “Part 2011” was acquired last year for ₦120,000 and has a useful life of six years with no residual value.
  2. The machine could be sold today for ₦30,000.
  3. Product and process engineering costs will cease after one year if outsourced.
  4. Rent savings from storage use if “Part-2011” production stops is ₦2,000.
  5. General overheads are fixed and not allocated to “Part-2011” if outsourced.
  6. Assume a required rate of return of 12%.

Required:
a. Should DG Limited outsource “Part 2011”? (10 Marks)
b. What maximum price should KK Plc quote for 1,000 units to make DG indifferent between outsourcing and internal production? (5 Marks)
c. What non-financial factors would favor internal production over outsourcing? (5 Marks)

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  • 10 Marks

BMF – Nov 2023 – L1 – SB – Q5a – Basics of Business Finance and Financial Markets

Discuss non-financial considerations in make-or-buy decisions

Managers think about non-financial issues as well as financial issues when making outsourcing decisions.

i. Explain SIX non-financial considerations that will be relevant to a make-or-buy decision. (6 Marks)

ii. Describe with the aid of an example in each case, two non-financial benefits from outsourcing work to an external supplier. (4 Marks)

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  • 20 Marks

MI – May 2017 – L1 – SB – Q3 – Decision-Making Techniques

Evaluate whether to continue outsourcing or manufacture in-house using cost analysis.

SEAGULL FABRICATORS LIMITED buys a component for N280 per unit, 6,000 units of which it uses monthly. Below is the cost of making the same component in-house:

UNIT COST (N) TOTAL COST (N)
Direct Material 100 600,000
Direct Labour 100 600,000
Variable Overheads 50 300,000
Total 250 1,500,000

To be able to fabricate the component, the company needs to purchase a mould for N5,000,000 with an expected life span of five years. Also, an annual rent of N1,000,000 needs to be paid for the space needed for the fabrication. Power consumption is also expected to increase by N500,000 per year.

Required:

a. You are required to advise the company whether to discontinue the outsourcing of the component or commence local fabrication. (8 Marks)

bi. State THREE qualitative factors to be taken into consideration before a decision is taken to outsource a component hitherto fabricated in-house. (6 Marks)

ii. List THREE quantitative factors usually considered in the case referred to in (bi) above. (6 Marks)

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  • 20 Marks

MA – Mar 2024 – L2 – Q5 – Relevant cost and revenue | Decision making techniques

This question determines the optimal units for in-house production versus outsourcing based on machine hour constraints and relevant cost analysis.

Hwerema Technologies produces various components for telecom companies. The demand for these components is increasing. However, Hwerema Technologies’ production facility is restricted to 50,000 machine hours. Therefore, the company is considering whether to import certain components to make up for the shortfall in production to meet market demand. In this respect, the following information has been gathered:

Factory overheads include fixed overheads estimated at GH¢1.50 per machine hour.

Required:
a) Determine the optimal units to be produced in-house and units to be imported. (16 marks)
b) State FOUR (4) qualitative considerations relevant to make-or-buy decisions. (4 marks)

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  • 20 Marks

MA – May 2021 – L2 – Q5b – Decision making techniques, Budgetary control

Recommend the quantities Agrow Ltd should produce in-house and purchase externally, along with the total annual cost.

Agrow Ltd is a community company that manufactures and sells car components; Wiper, Driving mirror, and Brake pad. The budgeted information for the next year is expected to be as follows:

WIPERS DRIVING MIRROR BRAKE PAD
Production (units) 50,000 25,000 35,000
GH¢ GH¢ GH¢ GH¢
Selling price per unit 34 30 28
Direct material per unit 9 10 5
Direct labour cost per unit 18 3 12
Variable production overhead 1 2 1

Direct labour is paid at GH¢12 per hour. While other production factors are unlimited, labour is limited to 102,500 hours. Hence, an extra component must be purchased from an external supplier.

Total fixed cost per annum is expected to be as follows:

Cost GH¢
Incurred as a direct consequence of making any quantity of Wiper 140,000
Incurred as a direct consequence of making any quantity of Driving mirror 255,000
Incurred as a direct consequence of making any quantity of Brake pad 150,000
Other Fixed Cost 60,000
Total Fixed Cost 605,000

An external supplier has offered to supply a unit of the following at their respective prices:

Component GH¢
Wiper 32
Driving mirror 24
Brake pad 23

Required:

a) Advise which of the products Agrow Ltd should make in-house or outsource. (7 marks)

b) Recommend the quantities that Agrow Ltd should make and the quantities it should buy externally to obtain the required quantities of all the parts and calculate the total annual cost. (10 marks)

c) State THREE (3) factors to consider before setting a selling price of a product. (3 marks)

(Total: 20 marks)

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