ACCA PM · Chapter 8 · Question 7 of 10
A company needs both components P and Q but has insufficient labour hours to make all its requirements, so it must buy in some units. Details per unit are: Component P: variable cost to make $14, price to buy $20, labour 2 hours Component Q: variable cost to make $10, price to buy $18, labour 4 hours Which component should be bought in first, and why?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Component Q, because the extra cost of buying is only $2.00 per labour hour saved
Explanation
When labour is scarce, buy the component with the lowest extra cost per hour of labour saved. P: ($20 - $14) / 2 hours = $3.00 per hour. Q: ($18 - $10) / 4 hours = $2.00 per hour. Q should be bought first, even though its extra cost per unit ($8) is higher than P's ($6).
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