ACCA SBL Syllabus G. Finance In Planning And Decision-Making - Make or Buy Decisions - Notes ^{9 / 11}

So here we have spare room to MAKE more products, therefore...

Production resources may be idle (if the component is purchased from outside)
Fixed costs are irrelevant (because we won't need any extra fixed costs)
So just consider the variable costs of MAKING compared to the purchase cost of BUYING

So we need to buy more space or stop making something to create space

Stopping making something to create capacity causes lost contribution
So compare the contribution lost + extra costs of MAKING to the purchase price of BUYING

Craft Ltd makes four components A, B, C, and D and the associated annual costs are as follows:

	A	B	C	D
Production volume (units)	1,500	3,000	5,000	7,000

Unit variable costs	$	$	$	$

Direct Materials	4	4	5	5
Direct Labour	8	8	6	6
Variable production overheads	2	1	4	5
Total	14	13	15	16

Fixed costs directly attributable are:	3,000	6,000	10,000	7,000
The unit prices of an external supplier are:	12	16	20	24

Determine whether any of the components should be bought in from the external supplier.

	A	B	C	D
Costs if Made	14	13	15	16
Costs if Bought	(12)	(16)	(20)	(24)
Savings per unit Bought	2	(3)	(5)	(8)
Number of units	1,500	3,000	5,000	7,000

Total Savings if Bought	3,000	(9,000)	(25,000)	(56,000)
Plus Direct Fixed Costs Saved	3,000	6,000	10,000	7,000

Total Saving	6,000	(3,000)	(15,000)	(49,000)

Therefore only buy in component A as this is the only one which makes a saving if bought in

Will the decision to “buy” lead to industrial disputes
Will the decision to “buy” decrease the quality of the component
Will the decision to “make” focus the organisation on improving the flexibility of production