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CMA Intermediate · Management Accounting · Marginal Costing (Management Accounting)

Tara Engineering buys a part at Rs 95 per unit. Making it needs variable cost of Rs 80 per unit and extra specific fixed cost of Rs 30,000 per year. At what annual volume is the firm indifferent between making and buying?

The indifference volume is 2,000 units. Buying saves nothing in fixed cost but costs Rs 15 more per unit than making variably, so the Rs 30,000 specific fixed cost is recovered at 30,000 divided by 15, which is 2,000 units.

  1. A1,500 units
  2. B2,000 unitsCorrect
  3. C2,500 units
  4. D3,000 units

Explanation

Indifference point: 95x = 80x + 30,000, so 15x = 30,000 and x = 2,000 units. Above this volume making is cheaper. 1,500 would come from wrongly using a different saving per unit.

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