Page 245 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 4. 150 units of A and 350 units of B

Product A 150units × `4 600
Product B 350units × `8 2,800
Contribution 3,400
Fixed overheads 1,500
Profi t 1,900

Mix A B C D
Contribution ` 1,500 1,700 900 1,900
The profit level among the given various mixes, the mix (d) is able to generate highest volume of

profit over the others.
Determining optimum level of operations: Under this method, the level has to be found out

which is having lesser selling price, cost of operations and greater profits known as optimum
level of operations
12.3 Make or Buy Decisions

The firms, which are routinely in need of spares, accessories are bought from the outsiders instead

of any production or manufacturing, though the requirement is at regular intervals. Most of the
automobile manufacturers are usually buying the components from outside instead of producing
them on their own. The Maruti Udyog Ltd. had given a contract to the Nettur Technical Training
Foundation, Bangalore to design the tool for the panel and to manufacture regularly to the tune
of the orders.
The leading four wheeler manufacture in India is buying the panel from the NTTF on contract
basis in stead of manufacturing.

Did u know? Why don’t they manufacture in spite of buying them from the NTTF?
The main reason of buying is cheaper than the production of an article.

Example: The management of a company finds that while the cost of making a component
part is ` 20, the same is available in the market at ` 18 with an assurance of continuous supply.
Give a suggestion whether to make or buy this part. Give also your views in case the supplier
reduces the price from ` 18 to ` 16
The cost information is as follows:

(`)
Material 7.00
Direct Labour 8.00
Other variable expenses 2.00
Fixed expenses 3.00
Total ` 20.00

The first point to be found out that the contribution of the transaction. The cost of manufacturing

should be compared with the price of the product which is available in the market.

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