To determine the cost per unit of making the part at ABC Company, we will first break down the total costs incurred when producing 10,000 units.
Breakdown of Costs for 10,000 Units
- Direct Materials: Birr 5,000
- Direct Labor: Birr 8,000
- Mixed Overhead: This consists of fixed and variable costs.
- Fixed Overhead: Birr 10,000
- Variable Mixed Overhead: Calculate the variable costs associated with material handling and setup costs based on the number of batches.
- Total Batches = 100 (10,000 units / 100 units per batch)
- Variable Cost per Batch = Birr 50
- Total Variable Mixed Overhead = 100 batches * Birr 50 = Birr 5,000
- Total Mixed Overhead = Fixed Overhead + Variable Mixed Overhead = Birr 10,000 + Birr 5,000 = Birr 15,000
- Variable Overhead: Birr 4,000
- Fixed Overhead: Birr 3,000 (Assuming this is a misplacement; fixed overhead is already included in mixed overhead).
Total Cost Calculation
Next, we can calculate the total cost of making the part:
\[ \text{Total Cost} = \text{Direct Materials} + \text{Direct Labor} + \text{Total Mixed Overhead} + \text{Variable Overhead} \]
Substituting in the values:
\[ \text{Total Cost} = 5,000 + 8,000 + 15,000 + 4,000 = 32,000 \text{ Birr} \]
Cost per Unit
Now we find the cost per unit:
\[ \text{Cost per Unit} = \frac{\text{Total Cost}}{\text{Number of Units}} = \frac{32,000}{10,000} = 3.2 \text{ Birr per unit} \]
Decision: Manufacture vs. Buy
- Cost of Making: Birr 3.2 per unit
- Cost of Buying from XYZ: Birr 2 per unit
Conclusion
- Should ABC Company manufacture the part or buy it?
Since the cost to manufacture the part (Birr 3.2) is greater than the cost to buy it from XYZ Company (Birr 2), ABC Company should buy the part from XYZ Company.
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