Hussain Corporation annually produces 10,000 units of assembly part number 206.

Question

Hussain Corporation annually produces 10,000 units of assembly part number 206. An outside supplier has offered to manufacture the part at Rs.9 per unit. If Hussain Corporation decides to buy the part, they will be able to rent the existing area for Rs. 8.000 per year. Listed below are Hussain's total costs to produce part 206: Rs. Total ( Rs. ) Direct material 2.50 25.000 Direct Labor 4.00 40,000 Variable overhead 2.25 22.500 Fixed Overhead 0.75 7.500 Total 9.50 95.000 Assuming that no additional costs are inclined in purchasing the part, what should be the opportunity cost for Hussain Corporation if it will buy? Support your answer with computations.

Explanation / Answer

1. Current COst of part no 206 is (25000+40000+22500)/10000 = 8.75 pu Fixed cost of 7500 will be incurred whether Part is produced or purchased. 2. Cost of procuring Part 206 from outside supplier = 9.0 pu. So saving in cost = (9.00-8.75)*10000 = 2500 3. Incremental Income from renting (8000 Rent -7500 existing FC) = 500 So net saving in Buying part 206 = 2500+500 = 3000 So opportunity cost for Hussan corporation is Rs 3000 if it buys part 206.

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