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PROBLEM 1: MAKE or BUY
Limos Mfg. has been manufacturing furniture sets and is considering whether to
make or outsource its own seat cushions needed for its chairs. The expected price
of the cushions is P50 per unit.
If it continue to produce the company would incur the following unit cost: Direct
materials P13, Direct Labor P15, Variable
the average production requirement of 10,000 units) P20 for a total of P53.
Let us assume that materials and labor costs are expected to increase by 20% next
period.
overhead will be eliminated in case the company decides to buy the seat cushions
from other suppliers. Moreover, the facilities presently being used in the manufacture
of seat cushions can be utilized to manufacture another part of the main product in
case such facilities become vacant when the company decides to stop producing the
seat cushions. The alternative use of resources would result into cost savings of
P100,000. Assume further that the company’s requirement for seat cushions is
expected to increase by 4,000 units next period.
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