ABC Ltd.'s Decision on Air Circulating Fans
ABC Ltd. produces room coolers. The company is considering whether it should continue to manufacture air circulating fans itself or purchase them from outside. Its annual requirement is 25,000 units. An outside vendor is prepared to supply fans for Rs. 285 each. In addition, ABC Ltd. will have to incur costs of Rs. 1.50 per unit for freight and Rs. 10,000 per year for quality inspection, storing, etc., of the product.
Cost Analysis of In-House Production
In the most recent year, ABC Ltd. produced 25,000 fans at the following total cost:
- Material: Rs. 50,00,000
- Labour: Rs. 20,00,000
- Supervision & other indirect labour: Rs. 2,00,000
- Power and Light: Rs. 50,000
- Depreciation: Rs. 20,000
- Factory Rent: Rs. 5,000
- Supplies: Rs. 75,000
Power and light include Rs. 20,000 for general heating and lighting, which is an allocation based on the light points. Indirect labour is attributed mainly to the manufacturing of fans. About 75% of it can be dispensed with along with direct labour if manufacturing is handled externally.
From United States, New York
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ABC Ltd. produces room coolers. The company is considering whether it should continue to manufacture air circulating fans itself or purchase them from outside. Its annual requirement is 25,000 units. An outside vendor is prepared to supply fans for Rs. 285 each. In addition, ABC Ltd. will have to incur costs of Rs. 1.50 per unit for freight and Rs. 10,000 per year for quality inspection, storing, etc., of the product.
Cost Analysis of In-House Production
In the most recent year, ABC Ltd. produced 25,000 fans at the following total cost:
- Material: Rs. 50,00,000
- Labour: Rs. 20,00,000
- Supervision & other indirect labour: Rs. 2,00,000
- Power and Light: Rs. 50,000
- Depreciation: Rs. 20,000
- Factory Rent: Rs. 5,000
- Supplies: Rs. 75,000
Power and light include Rs. 20,000 for general heating and lighting, which is an allocation based on the light points. Indirect labour is attributed mainly to the manufacturing of fans. About 75% of it can be dispensed with along with direct labour if manufacturing is handled externally.
From United States, New York
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ABC Ltd should purchase the air circulating fans from outside as the cost of manufacturing is more than what is available in the market. I didn't understand the meaning of the last line, "About 75%..." as it is incomplete.
Thanks and regards,
Krishna Sati
[Phone Number Removed For Privacy Reasons]
From United States, Cambridge
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Thanks and regards,
Krishna Sati
[Phone Number Removed For Privacy Reasons]
From United States, Cambridge
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Decision on Manufacturing or Purchasing Fans
About 75% of the labor can be dispensed with, along with direct labor, if manufacturing is discontinued. However, the supervisor, who receives an annual salary of Rs 75,000, will have to be retained. The machines used for manufacturing fans, which have a book value of Rs 3,00,000, can be sold for Rs 1,25,000, and the amount realized can be invested at a 15% return. Factory rent is allocated based on area, and the company is not able to find an alternative use for the space that would be released. Should ABC Ltd. manufacture the fans or buy them?
Sorry, I tried reposting it, but it didn't come out in full. I think posts have a limited number of words here. Please help solve this question as it's important, as soon as possible.
From United States, New York
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About 75% of the labor can be dispensed with, along with direct labor, if manufacturing is discontinued. However, the supervisor, who receives an annual salary of Rs 75,000, will have to be retained. The machines used for manufacturing fans, which have a book value of Rs 3,00,000, can be sold for Rs 1,25,000, and the amount realized can be invested at a 15% return. Factory rent is allocated based on area, and the company is not able to find an alternative use for the space that would be released. Should ABC Ltd. manufacture the fans or buy them?
Sorry, I tried reposting it, but it didn't come out in full. I think posts have a limited number of words here. Please help solve this question as it's important, as soon as possible.
From United States, New York
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Manufacturing vs. Purchasing Decision for ABC Ltd.
About 75% of the labour costs can be dispensed with, along with direct labour, if manufacturing is discontinued. However, the supervisor, who receives an annual salary of Rs. 75,000, will have to be retained. The machines used for manufacturing fans, which have a book value of Rs. 3,00,000, can be sold for Rs. 1,25,000, and the amount realized can be invested at a 15% return. Factory rent is allocated based on area, and the company is not able to find an alternative use for the space that would be released. Should ABC Ltd. manufacture the fans or buy them?
From India, Chennai
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2About 75% of the labour costs can be dispensed with, along with direct labour, if manufacturing is discontinued. However, the supervisor, who receives an annual salary of Rs. 75,000, will have to be retained. The machines used for manufacturing fans, which have a book value of Rs. 3,00,000, can be sold for Rs. 1,25,000, and the amount realized can be invested at a 15% return. Factory rent is allocated based on area, and the company is not able to find an alternative use for the space that would be released. Should ABC Ltd. manufacture the fans or buy them?
From India, Chennai
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