Answer to Question #56608 in Economics for Noja

Question

Swagat Manufacturing Sdn. Bhd. needed to determine if it would be cheaper to make 10,000 units of a component in-house or to purchase them from an outside supplier for $4.75 each.
Cost information on internal production includes the following:
Total Cost Unit Cost
$ $

Direct materials 10,000 1.00
Direct labour 20,000 2.00
Variable overheads 8,000 0.80
Fixed overheads 44,000 4.40
Total 82,000 8.20
Fixed overhead will continue whether the component is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.
Required:
a) List the relevant cost of internal production and external purchase.

Answer 1

As the total cost of producing this good is $8.20 and the possible cost of buying from another supplier is $4.75, so it will be cheaper to buy from another supplier to minimize costs and maximize profits.