Week 9 ACCY 111 RJD Lecture 5

How might those labour hours be most profitably used

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How might those labour hours be most profitably used? (Still assuming that the market will buy as many units
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The most efficient use of scarce resources Red Box Blue Box Green Box $ $ $ Selling price per box 50.00 40.00 70.00 Variable costs per box 20.00 20.00 35.00 Contribution per box 30.00 20.00 35.00 Skilled labour time per box 4 4 8 Contribution per labour hour $ 7.50 $ 5.00 $ 4.38 For 100 labour hours $ 750.00 $ 500.00 $ 437.50 TOTAL Weekly demand in units 5 20 15 Required labour hours 20 80 120 220 But what if there is a limit to how many boxes can be sold?
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Make or Buy? Should the organisation make a product (or deliver a service) using its own resources or should it pay another, external organisation to make the product (or deliver the service) for it? Such decisions might relate to a component of a final product or service or the whole product or service.
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Make or Buy – spare capacity Better Bakers, a small boutique bakery, makes three forms of loaf and has spare capacity. Bread Bin Bakery has offered to make their sliced white loaf for $5 per loaf. Better Bakers - April 2012 Sliced White Loaf Brown Loaf Wholemeal Loaf Total Production units per week 1,000 1,500 2,000 Selling Price 8.00 10.00 12.00 Sales 8,000 15,000 24,000 47,000 Variable Costs 6,000 9,000 20,000 35,000 Contribution 2,000 6,000 4,000 12,000 Attributable Fixed Costs 1,000 3,000 1,000 5,000 Apportioned Fixed Costs 800 2,400 800 4,000 Profit 200 600 2,200 3,000
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Make or Buy – spare capacity Sliced White Loaf Brown Loaf Wholemeal Loaf Total Production units per week 1,000 1,500 2,000 Variable costs - materials 4 4 6 - labour 2 2 4 $ 6 $ 6 $ 10 Total Variable Costs 6,000 9,000 20,000 35,000 Fixed costs - attributable 1,000 3,000 1,000 5,000 - apportioned 4,000 TOTAL COSTS $ 44,000
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Make or Buy – spare capacity Variable costs per sliced white loaf $6 Attributable fixed costs $1 $7 External purchase cost $5 Savings per loaf $2 Savings for 1000 loaves a week $2,000
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Make or Buy – spare capacity Better Bakers should accept the offer and outsource the production of white loaves. Better Bakers Forecast Sliced White Loaf Brown Loaf Wholemeal Loaf Total Selling Price 8.00 10.00 12.00 Sales 8,000 15,000 24,000 47,000 Variable Costs 5,000 9,000 20,000 34,000 Contribution 3,000 6,000 4,000 13,000 Attributable Fixed Costs 3,000 1,000 4,000 Apportioned Fixed Costs 3,000 1,000 4,000 Profit 3,000 - 2,000 5,000
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Make or Buy – spare capacity Variable costs of making 6 Additional costs of buying 5 $ (1) Variable costs saved by buying (1,000) Fixed costs saved by buying (1,000) Total costs saved of buying $ (2,000)
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Make or Buy – no spare capacity What if there were a fourth loaf, a Farmers loaf, that used the same production facilities as the Wholemeal Loaf? In other words at full capacity Farmers loaves can only be made at the cost of making fewer Wholemeal loaves. If Bread Bin Bakery can also make Farmers Loaves for Better Bakers at a cost of $12, should they accept that offer?
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Make or Buy – no spare capacity Better Bakers Forecast Wholemeal Loaf Farmers Loaf Selling Price 12.00 13.00 Variable costs - materials 6 4 - labour 4 4 $ 10 $ 8 Contribution $ 2 $ 5 Variable Farmers Loaf costs 8 Lost Wholemeal Loaf contribution 2 $ 10 Additional cost of buying $ 12
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Make or Buy Assuming the organisation has spare capacity: is the external cost more than the internal variable cost?
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