Our company makes and sells cell-phone sanitizer units. Cell phones are inserted inside the units and bathed in UV-C ultraviolet light that eliminates 99.9% of bacteria and viruses in approximately 10 minutes. We estimate unit sales of 17,000 for the next year at the selling price of $160 per unit.

Historically, we have manufactured all of the components of the sanitizer units. One component of the sanitizer unit is the UV-C light module. We are considering an outside supplier's offer to sell us the UV-C light module for $32 each, in sufficient quantities and of sufficiently high quality for our needs.

One advantage of outsourcing the UV-C light module to the outside supplier is that we could use the freed-up space and production equipment to immediately launch a new product. The new product would bring an annual contribution margin of $117,000.

The cost data for our internal production of the UV-C light module are below:

17,000

per unit units

Direct materials $14 $238,000

Direct labor 8 $136,000

Variable overhead 3 $51,000

Fixed overhead 9 $153,000

$34 $578,000

The $9 per unit Fixed overhead (FOH) consists of two parts:

1. Allocated corporate-level FOH of $6 per unit; if we outsource, this will be re-allocated to other components and to the completed sanitizer units;

2. FOH specific to the UV-C light module of $3 per unit. One-third of this is the annual rental of a special tool used only in production of the UV-C light modules; if we outsource, we will not have to make this annual rental payment. The remaining two-thirds of this FOH part will still be incurred; it will be allocated to the new product we would launch if we outsource.

 

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