ExpertMedium2 marksMultiple Choice
ACCA · Question 8 · Decision-making techniques
Section A
CraftWorks manufactures custom furniture. It is currently facing a shortage of skilled labor. It can either make a specific table leg in-house or buy it from an external supplier.
Variable cost to make: $15
External purchase price: $22
Skilled labor hours required to make: 0.5 hours
What is the extra cost of buying externally per limiting factor (skilled labor hour)?
Section A
CraftWorks manufactures custom furniture. It is currently facing a shortage of skilled labor. It can either make a specific table leg in-house or buy it from an external supplier.
Variable cost to make: $15
External purchase price: $22
Skilled labor hours required to make: 0.5 hours
What is the extra cost of buying externally per limiting factor (skilled labor hour)?
Answer options:
A.
$7 per hour
B.
$14 per hour
C.
$30 per hour
D.
$44 per hour
How to approach this question
1. Find the extra cost to buy one unit (Purchase price - Variable cost to make). 2. Divide this extra cost by the amount of the limiting factor saved by buying it.
Full Answer
B.$14 per hour✓ Correct
In a make-or-buy decision with a limiting factor, you prioritize making products that save the most money per unit of the limiting factor.
Extra cost to buy = $22 - $15 = $7 per unit.
Hours saved by buying = 0.5 hours per unit.
Extra cost per hour saved = $7 / 0.5 = $14 per hour.
Common mistakes
Stopping at the extra cost per unit ($7) and not converting it to the cost per limiting factor.
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