Example of make and buy decision
limited
Product A
|
Product B
|
Product C
|
|
Sale price
|
100
|
120
|
140
|
Variable Cost
|
80
|
100
|
100
|
Hours per unit
|
3
|
2
|
3
|
Unit to produced
|
4000 Unit
|
4000 Units
|
4000 Units
|
Supplier offer
|
90
|
110
|
120
|
Available machine hours
|
15,000
|
Should Farhan and company buy or make the product
Solution
1. Cost per hour saved by making
A
|
B
|
C
|
|
Variable cost Making
|
80
|
100
|
100
|
Variable cost buying
|
90
|
110
|
120
|
Variable over buying
|
10
|
10
|
20
|
Machine hour saved
|
3
|
2
|
3
|
Cost per hour saved
|
3.33
|
5
|
6.667
|
2. Make and buy mix
PRODUCT
|
UNITS
|
HOUR
PER UNIT
|
TOTAL
HR
|
UNIT
RATE
|
AMOUNT
|
C
|
4000
|
3
|
12,000
|
100
|
400,000
|
B
|
1500
|
2
|
3,000
|
100
|
150,000
|
550,000
|
|||||
2,500
|
110
|
275,000
|
|||
A
|
4000
|
90
|
360,000
|
||
635,000
|
|||||
1,185,000
|
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