Prem Industry is considering making its own motor castings, which it currently purchases for ? 20.50 per unit. This purchase price does not include the ordering, receiving, and inspection costs, which Prem estimates to be ? 2 per unit. Prem feels that, it can manufacture the 6,500 required units at a lower cost than it pays by purchasing externally. The relevant costs for both the producing and buying alternatives are as follows:
Incremental Analysis for Motor Castings ( 6,500 Units)
\begin{tabular}{|l|r|r|r|}
\hline \multicolumn{1}{|c|}{ Particulars } & Per Unit & Cost to Make & Cost to Buy \\
\hline Direct Materials & 6.25 & 40,625 & \\
\hline Direct Labour & 10.00 & 65,000 & \\
\hline Variable Factory Overhead & 5.00 & 32,500 & \\
\hline Purchase Price & 20.50 & & \( 1,33,250 \) \\
\hline Ordering, Receiving and Inspection Costs & 2.00 & & \( \underline{13,000} \) \\
\hline Total Relevant Costs & & \( \underline{1,38,125} \) & \( \underline{1,46,250} \) \\
\hline
\end{tabular}
