Levoy, Corp., estimates it will produce 25,000 units of an electronic sensor part that goes into one of its final products, called a Fluctotron. It currently produces this sensor internally but is considering outsourcing this activity. Current internal capacity permits the production of a maximum of 40,000 sensors. The production manager has prepared the following information concerning the internal manufacture of 40,000 sensors:
Per Sensor
Direct materials ...... $15.00
Direct labor ........ 8.00
Variable overhead .... 10.00
Fixed overhead ..... 11.00
Total cost ....... $44.00

The fixed overhead of $11 per unit includes a $2 per unit allocation for salary paid to a supervisor to oversee production of sensors. The fixed costs would not be reduced by outsourcing, except the supervisor would be fired (the company would terminate his contract). Assume that if Levoy outsources, its purchase price from the outsourcer is $38 per unit.
1. Should Levoy outsource? Why or why not?
2. Assume that if Levoy outsourced, it would create sufficient excess capacity such that it would retain the supervisor and have him oversee production of a new optical reading product, called a Scanmeister. If each Scanmeister generates a contribution margin of $15 and the company produces 10,000 Scanmeisters, what is the maximum price Levoy would accept for outsourcing the sensors?

  • CreatedNovember 19, 2014
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