CAF-5 · Chapter 17 · Question 12 of 20
(Decision Making: Make or Buy with Limiting Factor) A company lacks sufficient machine hours to meet demand and must outsource one of its components. Component A costs Rs. 40 to make (requiring 2 machine hours) and Rs. 50 to buy. Component B costs Rs. 60 to make (requiring 4 machine hours) and Rs. 75 to buy. To minimize the financial penalty, which component should be outsourced first?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Component B, because the extra cost per machine hour saved is lower.
Explanation
Extra cost to buy Component A = 50 - 40 = Rs. 10. Savings = 2 hours. Extra cost per hour saved = 10 / 2 = Rs. 5/hr. Extra cost to buy Component B = 75 - 60 = Rs. 15. Savings = 4 hours. Extra cost per hour saved = 15 / 4 = Rs. 3.75/hr. Outsourcing B yields a smaller financial penalty per scarce hour saved.
More Mixed Practice Challenge I MCQs
- Q14(Standard Costing: Working Backwards) A company uses standard absorption costing. Budgeted fixed overheads were Rs. 300,000 and budgeted…
- Q15(Process Costing: FIFO Equivalent Units) At the start of the month, Work-In-Process was 2,000 units (60% complete as to conversion)…
- Q16(Job Costing & Absorption) A specific job incurs prime costs of Rs. 60,000. It requires 500 direct labour hours in Department A and 300…
- Q17(Labour Costing: Premium Bonus Plan) A factory sets a standard time of 30 minutes to produce one unit. The standard basic wage is Rs. 80…
- Q18(Decision Making: Shut Down) Product Line Z generates sales revenue of Rs. 200,000 and incurs variable costs of Rs. 140,000. It is…