Make vs Buy Harish Aggarwal, A management accountant with Car Udyog is evaluating whether a component MTR2000 should continue to be manufactured by Car or purchased from Outside Vendor company. Outside Vendor has submitted a bid to manufacture and supply the 32000 units of MTR 2000 that Car udyog will need for 2021 at a selling price of Rs 173 Harish has gathered the following information regarding Car Udyog's costs to manufacture 30000 units of MTR-2000 IN 2020 Direct Materials Direct Manufacturing Labour Plant space rental Equipment leasing Other manufacturing overhead Total Manufacturing costs 19,50,000 12,00,000 8,40,000 3,60,000 22,50,000 66,00,000 Harish has also collected the following information related to manufacturing MTR 2000: a. Prices of direct materials used in the production of MTR 2000 are expected to increase by 8% in 2021 b. Car Udyog's direct manufacturing labour contract calls for a 5% increase in 2021 c. Car Udyog can withdraw from the plant space rental agreement without any penalty. Car Udyog will have no need for this space if MTR 2000 is not manufactured d. The equipment lease can be terminated by paying Rs 60,000/- e. 40% of the other manufacturing overhead is considered variable. Variable overhead changes proportionately with the number of units produced. The fixed component of other manufacturing overheads is expected to remain the same whether or not MTR 2000 is manufactured Required: a. On the basis of the financial information Harish has obtained, calculate the cost of making MTR 2000 inhouse in 2021 ?Please share calculations b. Please compare with the cost of outsourcing the product and whether it is profitable to buy or manufacture MT 2000?
Make vs Buy
Harish Aggarwal, A
Harish has gathered the following information regarding Car Udyog's
Direct Materials
Direct Manufacturing Labour Plant space rental
Equipment leasing
Other manufacturing overhead
Total Manufacturing costs
19,50,000 12,00,000 8,40,000 3,60,000 22,50,000 66,00,000
Harish has also collected the following information related to manufacturing
MTR 2000:
a. Prices of direct materials used in the production of MTR 2000 are expected to
increase by 8% in 2021
b. Car Udyog's direct manufacturing labour contract calls for a 5% increase in 2021
c. Car Udyog can withdraw from the plant space rental agreement without any
penalty. Car Udyog will have no need for this space if MTR 2000 is not
manufactured
d. The equipment lease can be terminated by paying Rs 60,000/-
e. 40% of the other manufacturing overhead is considered variable. Variable
overhead changes proportionately with the number of units produced. The fixed component of other manufacturing overheads is expected to remain the same whether or not MTR 2000 is manufactured
Required:
a. On the basis of the financial information Harish has obtained, calculate the cost of
making MTR 2000 inhouse in 2021 ?Please share calculations
b. Please compare with the cost of outsourcing the product and whether it is profitable to buy or manufacture MT 2000?
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