1. 1 MAKE OR BUY PARTS AND COMPONENT DECISION A manufacturing enterprise may produce products using various types of parts, components. All these parts have been either produced within factory or purchased from outside. A firm produces the parts and components if they are not available in the market. Similarly it purchases if there is no capacity to produce them within organization. But when both conditions are available at same time, i.e. parts and components are available in the market as well as idle capacity in the factory, a manager should take decision whether to manufacture the parts in the factory or purchase it from outside suppliers. In order to reach at decision, comparative cost analysis is necessary.

2. 2 Relevant costs The following costs should be considered as relevant cost for making parts and components. Direct materials Direct labour Additional fixed cost Opportunity cost due to making Variable overhead Additional other expenses if required

3. 3 Relevant cost for purchasing parts Similarly the following costs are relevant for purchasing parts and components from outsiders. Purchase parts and components Transportation costs, shipping, carriage etc. Other expenses if required due to purchase. Based on above relevant analysis, we have to reach at decision whether to manufacture or purchase it from outside suppliers.

4. 4 Factors affecting decisions However, costs are not only the basis of decision making the following other factors should be considered to reach in decision. Quality of parts or components Reliabilities of suppliers Possibilities of price changes Opportunity cost if manufactured Alternative utilities of idle capacity if purchased etc.

5. 5 1 A company is now producing small subassemblies that are used in the production of one of the company’s main product lines. The company’s accounting department reports the following cost of producing the subassembly internally. Particulars Per unit8,000 units Direct materialsRs.3Rs.24,000 Direct labour432,000 Variable overhead18,000 Supervisor’s salary324,000 Depreciation of special equipment216,000 Allocated general overhead540,000 Rs.18Rs.144,000 The company has just received an offer from an outside supplier who will provide 8,000 subassemblies a year at a firm price of Rs.15 each. Required: 1.Should the company stop producing the subassemblies internally and start purchasing from the outside supplier? 2.Ii Would the decision made in (i) above change in case the space being used to produce subassemblies would generate a segment margin of Rs.50,000.

6. 6 The Nepal Casting Ltd. a company specialized in casting at present is producing a component called X used in the casting process. The annual need of 'component X' is 50,000 units. The data relating to produce one unit of component X are presented below: Direct MaterialRs. 2.00 Direct Labour ( 0.5 hour @ Rs.6 per hour ) 3.00 Manufacturing overhead ( based on D L H 5 hour @ Rs. 4 per hour ) 2.00 Total unit cost of production 7.00 The company received an offer from a company showing willingness to supply 50,000 units of component at an unit price of Rs.5 per unit. The company has followed as system of defining its plant capacity in terms of direct labour hours. The normal operation is 100,000 direct labour hour per year. The budgeted fixed overhead per annum is Rs. 250,000. All manufacturing overheads are applied to production on the basis of direct labour hour at Rs. 4 per hour. The company at present has sufficient excess capacity unutilized and a subcontracting of the component will further render idle unutilized capacity having no alternatives uses. Required: 1.Should the company start purchasing component X from the supplier or continue to produce its own? 2.Would your answer be different if the excess capacity thus, available could be rented out at an annual rent of Rs. 100,000?