$ Explanation

1) Fabric 3500 As the fabric is being used regularly by the business, hence it should be
valued at its current market price.

2) Wood 419 20 m of wood should be used from the inventory and valued at $8.20 as within tw
there is no usage of it. However, the remaining 30m must have to be bought from
market at the current market rate of $8.50.

3) Skilled Labor 1200 As labor has 150 hours of spare capacity, therefore the relevant cost for these ho
should be zero. The remaining 50 hours should be valued at overtime rate calcula
time ($16) and a half ($8).

4) Semi Skilled Labor 4200 As the local agency rate is better comparing to the overtime rate of (12+6) $18,
therefore, the company will contract with local agency to get the semi skilled lab
hours.

5) Supervisor cost 300 Fixed supervisor salary and general factory costs are irrelevant as these are not
incremental cashflows. However, overtime should be valued at overtime rate of
$15 per hour.

6) Administration OH 0 As admin overheads are apportioned overheads, hence it is irrelevant.

Total relevant cost 9619

Financial assessment of make and buy decisions

compare the direct manufacturing cost with the supplier quoted price and theone that is cheaper, select that option.

Direct manufacturing cost quoted price

Variable manufacturing cost given
Relevant fixed cost

Shellfish co example:

Components W X Y Z
Marginal costs 14 17 7 12.00
Direct fixed cost 1 2.5 1.5 2.67
Direct manufacturing
cost per unit 15.00 19.50 8.50 14.67
Quoted supplier price 12 21 10 14.00

Decision Buy Make Make Buy

Non financial factors

1) Quality
2) Quantity
3) Time (Delivery)
4) Price stability
5) Confidentiality
6) Redundancy cost
7) Social & Ethical
8) Motivation

Further Processing decision

If incremental revenues exceeds the incremental costs , company should further process the output.
However, if the incremental cost exceeds the incremental revenues, then the company should sell at split off point.
ce it should be

ued at $8.20 as within two weeks

st have to be bought from the

elevant cost for these hours

d at overtime rate calculated as

me rate of (12+6) $18,

o get the semi skilled labor

levant as these are not

ued at overtime rate of

t is irrelevant.

ect that option.

split off point.