cturers at a price of R15 per unit. The profit made on the sale of the 20 000 units is used to reduce the cost of 100 000 units. The company has been approached by a sale
Pearson Ltd is a manufacturer of high-quality tools. The company produces, besides others, 120 000 units per annum of a certain spare part that is frequently used in the manufacture of various tools. One hundred thousand (100 000) of these spare parts are used internally in the manufacture of tools, and 20 000 are sold to external manufacturers at a price of R15 per unit. The profit made on the sale of the 20 000 units is used to reduce the cost of 100 000 units.
The company has been approached by a sales representative of another manufacturing company, offering to provide the company with these spare parts at a price of R13 per unit, provided that at least 100 000 units are purchased per annum.
The following information regarding the section manufacturing this spare part has been extracted from the budget for the year ending 30 June 2021.
Material @ R1.50 per unit R 180 000
Labour @ R30 per hour R 720 000
Total cost @ R17.50 per unit R 2 100 000
Overheads consist of the following:
• Sectional overheads: R900 000
Sectional overheads are 60% fixed, 50% of which are committed fixed costs.
• Overheads of the enterprise R300 000
• Overheads of the enterprise comprise fixed managerial and administrative costs, which are allocated
to the various sections on the basis of labour hours.
• This particular production section manufactures only the abovementioned spare part.
Determine whether Pearson Limited should continue selling 20 000 units of the spare part to external manufacturers annually:
a. If the spare part is manufactured
b. If the spare part is purchased
Determine whether the company should purchase or manufacture the spare part:
a. In the long term
b. In the short term
Pearson Ltd is a manufacturer of high-quality tools. The company produces, besides others, 120 000 units per annum of a certain spare part that is frequently used in the manufacture of various tools. One hundred thousand (100 000) of these spare parts are used internally in the manufacture of tools, and 20 000 are sold to external manufacturers at a price of R15 per unit. The profit made on the sale of the 20 000 units is used to reduce the cost of 100 000 units.
| Price | Units |
| Material | 120000 |
| Rate per Units | 1.5 |
| Material costs | 180000 |
| Labor | 120000 |
| Rate per hour | 30 |
| Total Cost | 720000 |
| Hours | 24000 |
| Hours per unit | 0.2 |
| Per unit cost | 6 |
| Overheads | |
| Total cost | 1200000 |
| Sectional overheads | 900000 |
| Fixed | 540000 |
| Committed (unavoidable) | 270000 |
| Non-committed (avoidable) | 270000 |
| Variable | 360000 |
| Total units | 120000 |
| Per unit cost | 3 |
| Overheads of enterprise | 300000 |
| Allocated on the based of labor hours | |
| Total hours | 24000 |
| Rate per hour | 12.5 |
| Rate per unit | 2.5 |
| These are unavoidable costs |
Here the allocated overheads (administrative and managerial) and committed fixed costs are unavoidable even if we make or buy and hence such costs are excluded while determining the decision as they will be incurred even if we buy the product from outside
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