Suppose you have recently been contracted as a financial consultant to a London-based engineering company, Alpha Products Plc. The company uses three components as part of their production process, namely, A, B and C. The budgeted production output for the forthcoming year is to produce 10,000 of each of the three components.
The variable production cost per unit of the final product is as follows:
|
Machine Hour |
Variable cost |
|
|
|
| 1 Unit of A |
6 |
65 |
| 1 Unit of B |
4 |
90 |
| 1 Unit of C |
8 |
60 |
| Assembly |
|
50 |
|
Total |
265 |
Only 112,000 hours of machine time will be available during the year, and a sub-contractor has quoted the following unit prices for supplying the three components: A A??L72.50; B A??L100 and C A??L88.
(a) Using the above financial data provide calculations which support your advice to the company on whether it should produce the three components or outsource them.
(b) Explain the use of the principle of opportunity cost and why costminimisation and profit maximisation are compatible concepts and include a table showing the total variable cost of your selected production or purchasing plan.