Question 11.7: Jones Ltd needs a component for one its products. It can hav...
Jones Ltd needs a component for one its products. It can have the component made by a subcontractor, who will charge $20 for each. The business can produce the component internally for total variable costs of $15 each. Jones Ltd has spare capacity. Should it subcontract or produce the component in-house?
The answer is that Jones Ltd should produce the component itself, since the variable cost of subcontracting is greater by $5 than variable cost of internal manufacture.
Should the business have no spare capacity, it would be necessary to incorporate the opportunity cost of any time spent working on the component. This would be typically based on the loss of contribution from the time transferred from normal activity to work on the component.
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