SOLUTIONS TO QUESTIONS 421
10.6
The comparison of costs under each alternative is shown in Table A2.10.
Direct labour and fixed overheads are irrelevant in making a choice between alternatives.
Direct materials and variable overheads will not be incurred if the components are
purchased, and are therefore relevant costs.
Relevant costs are therefore as in Table A2.11.
If employees were on a temporary contract, labourcost would be avoidable and therefore
the comparison of costs would be as in Table A2.12.
Fixed overheads are irrelevant in making a choice between alternatives. Direct labour,
materials and variable overheads will not be incurred if the components are purchased,
and are therefore relevant costs.
Relevant costs are therefore as in Table A2.13.
Costs based on stock valuation are not relevant, as we are concerned with future
costs only.
Table A2.10
Manufacture 100 Purchase 100
Direct labour 100 @ £200 20,000 20,000
Direct material 100 @ £600 60,000
Variable overhead 100 @ £100 10,000
Fixed overheads 100 @ £300 30,000 30,000
Supplier price 100 @ £1,000 100,000Total £120,000 £150,000Table A2.11
Manufacture 100 Purchase 100
Direct material 60,000
Variable overhead 10,000
Supplier price 100,000
Total 70,000 100,000Table A2.12
Manufacture 100 Purchase 100
Direct labour 100 @ £200 20,000
Direct material 100 @ £600 60,000
Variable overhead 100 @ £100 10,000
Fixed overheads 100 @ £400 40,000 40,000
Supplier price 100 @ £1,000 100,000
Total £130,000 £140,000