Company A has to decide whether to manufacture Product X internally or to buy from outsiders at Rs.11. Annual demand of product X is 10,000. The details of Company A internal production costs are as follows:
Rs. per unit
Direct material 2.00
Direct labour 3.00
Variable production overhead 0.50
Fixed production overhead (2 hours x 0.25 per hour)0.50
Fixed production overhead is calculated on the basis of 200,000 direct labour horus. 60% of fixed overhead is eliminated if company purchase from outsider.
Company can produce 20,000 units of product Y if product X would be purchase from outsider and earned a contribution of Rs. 8 per unit.
Company also rent their premises portion to other company at an annual rental of Rs.30,000
Required:
Shoud Company manufacture product X internally or buy from outside supplier?