Company is considering outsourcing a key component. A reliable supplier has quoted a price of $65.50 per
Question:
Company is considering outsourcing a key component. A reliable supplier has quoted a price of
$65.50 per unit. The following costs of the component when manufactured in-house are expressed on a per unit basis
Direct materials | $23.40 |
Direct labor | 15.80 |
Variable overhead | 25.00 |
Fixed overhead | 7.00 |
Total costs | $71.20 |
Requirement
(a) | What assumptions need to be made about the behavior of overhead costs for Kalen in order to analyze the outsourcing decision? |
(b) | Should Kalen Company outsource the component? |
(c) | What other factors are relevant to this decision? |
Part 1
Requirement (a) What assumptions need to be made about the behavior of overhead costs for
Kalen
in order to analyze the outsourcing decision?
The assumption must be made
that the fixed overhead costs are not avoidable
that the purchase price is subject to change
that the variable overhead costs are avoidable
that the variable overhead costs are not avoidable
.
Part 2
Requirement (b) Should
Kalen Company outsource the component?
Complete the following analysis of the cost to outsource the key component. (Use a parentheses or minus sign to show a net additional cost of purchasing the key component. Leave unused cells blank.)
Item | Relevant amount | |
Savings: | ||
Additional costs: | ||
Total savings (additional costs) |
Part 3
Kalen should ................................
a)outsource
b)make
The company will be better of by $ ......... (enter your response here per unit).
Requirement (c) What other factors are relevant to this decision?
Other relevant factors: |
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young