Relevant Cost Exercise - Make or Buy

Furniture Inn manufactures computer tables. Recently a supplier has offered the tables of the same quality @ $14 each with an assurance of continued supply. The following is the budget for 4000 units prepared for the quarter ending 30 September 2016:

Required:

(a) Should Furniture Inn accept the offer from the supplier?

(b) What would be the decision if the supplier offered the tables at $12 each?

Solution:

 Calculation of per table marginal cost of production

(a) As marginal cost of production is less than the buying price offered by the supplier so Furniture Inn should continue production of tables. The distribution, administration and fixed production are irrelevant in the decision as presumptively they will be incurred in either case.

(b) As in this case they buy in price $12 is less than the marginal cost of production so Furniture Inn should buy the tables from the supplier and discontinue production of tables provided other things are favorable.