Problem 2 the Cost of Making Component Q Which Forms Part of Part

question 6

Essay

Problem 2
The cost of making component Q which forms part of product Y is stated as follows:
£
Raw material 4.00
Direct labour 8.00
Variable overhead 6.40
Fixed overhead 9.60
Total absorption cost per unit 28.00
Component Q could be brought from an outside supplier for 20.
b) You are required, assuming that fixed production costs will not change to state whether the company should continue making the component Q or buy it from outside. Explain the costs you use and your reasoning.

---

Definitions:

Borrow

To receive something, especially money, from a person or financial institution with the agreement to return it, typically with interest, at a future date.

Gross Domestic Product (GDP)

The nation’s expenditure on all the goods and services produced in the country during the year at market prices; represented by GDP.

Economics

The social science that studies the production, distribution, and consumption of goods and services, and how individuals, businesses, and governments make choices about allocating resources.

Investment

The act of allocating resources, usually money, into assets with the expectation of generating income or profit.