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ACCA Applied Skills · Performance Management · Limiting factors

Brenner Co needs 1,000 units each of components P and Q. Machine hours available are 3,000 and the machine time needed is 2 hours per unit of P and 3 hours per unit of Q. Variable make cost: P $20, Q $30. Buy price: P $26, Q $36. Which component should be bought externally first, and what is the extra cost per machine hour saved?

Component Q should be bought first, at an extra cost of $2 per machine hour saved. P costs $6 extra over 2 hours, which is $3 per hour, while Q costs $6 extra over 3 hours, which is $2 per hour. The lower figure is outsourced first.

  1. AP, at $3.00 per hour
  2. BQ, at $2.00 per hourCorrect
  3. CP, at $2.00 per hour
  4. DQ, at $3.00 per hour

Explanation

Extra cost of buying P is $6 for 2 hours saved, which is $3 per hour. For Q it is $6 for 3 hours saved, which is $2 per hour. Q is cheapest to outsource per hour saved, so buy Q first. Option A misidentifies the ranking.

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