NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY

Faculty of Engineering

Department of Industrial and Manufacturing Engineering

Course: Economics For Engineers

Course Code: EIE 3126

Assignment 1

Student Name and Number:

Marvellous Thabo Mpofu
N02123199W

Lecturer’s Name:
Mr. T. Kusuwani

Due Date:
27 September 2023
 QUESTION
Hungwe Pvt LTD is considering the alternatives of either manufacturing a component or
purchasing it from an outside supplier. The company's estimated production costs are as
follows:
Product Cost $
Direct Materials 100
Direct Labour 40
Variable Production Overheads 20
Absorbed Fixed Overheads 32
Full Production Cost 192

If the company does not produce the component, the capacity that is released is not utilized to
produce something else. An outside supplier has offered to sell the component to the
company at $180.00
Required:
Should the company buy the component or continue to make it?

QUANTITATIVE ANALYSIS OF MAKE OR BUY

✓ Hungwe Pvt LTD’s total production costs are capped at ($100 + $40 + $20) = $160
✓ Fixed costs are not part of production costs when making buy or decisions, hence they
aren’t considered in the quantitative analysis.
✓ The 3rd party company offers to sell the component $180

CONCLUSION
Hungwe Pvt LTD should reject the buy offer and continue to locally make the component
because it is much cheaper to do so. Making the part also has other advantages such as the
company directly managing the product quality, not risking its intellectual capital and so on.