The XYZ Ltd produces a single product which passes through three successive departments, X, Y and Z. Following are the budgeted annual production costs for an output of 30,000 units which is...

The XYZ Ltd produces a single product which passes through three successive departments, X, Y and Z. Following are the budgeted annual production costs for an output of 30,000 units which is considered to be the normal volume.

The marketing manager of the company has informed the management that it can purchase a semifinished product at a price of `5, delivered. Department Y can directly use this product instead of the basic raw material processed in Department X. However, direct labour and variable manufacturing overhead costs in Department Y would be 5 per cent more because of changes in operations necessitated by the introduction of the semi-finished product into the departments.

You are required to advise the company on the basis of short-run profitability whether it should purchase the semi-finished product or continue its existing practice of producing in Department X.