AID18903: Make vs Buy Harish Aggarwal, A management accountant

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AID18903: Make vs Buy Harish Aggarwal, A management accountant with Car Udyog is evaluating whether a component MTR2000 should continue to be manufactured by Car or purchased from Outside Vendor Company. Outside Vendor has submitted a bid to manufacture and supply the 32000 units of MTR 2000 that Car udyog will need for 2021 at a selling price of Rs 173 Harish has gathered the following information regarding Car Udyog’s costs to manufacture 30000 units of MTR-2000 IN 2020

Direct Materials19,50,000
Direct Manufacturing Labour12,00,000
Plant space rental8,40,000
Equipment leasing3,60,000
Other manufacturing overhead22,50,000
Total Manufacturing costs66,00,000

Harish has also collected the following information related to manufacturing MTR 2000: a. Prices of direct materials used in the production of MTR 2000 are expected to increase by 8% in 2021

Car Udyog’s direct manufacturing labour contract calls for a 5% increase in 2021

Car Udyog can withdraw from the plant space rental agreement without any penalty. Car Udyog will have no need for this space if MTR 2000 is not manufactured

The equipment lease can be terminated by paying Rs 60,000/-

40% of the other manufacturing overhead is considered variable. Variable overhead changes proportionately with the number of units produced. The fixed component of other manufacturing overheads is expected to remain the same whether or not MTR 2000 is manufactured

Required:

  1. On the basis of the financial information Harish has obtained, calculate the cost of making MTR 2000 in-house in 2021? Please share calculations
  2. Please compare with the cost of outsourcing the product and whether it is profitable to buy or manufacture MT 2000?