Sunshine, Corp., estimates it will produce 20,000 units of a part that goes into its final product. It currently produces this part internally, but is considering outsourcing this activity. Current internal capacity permits for a maximum of 40,000 units of the part. The production manager has prepared the following information concerning the internal manufacture of 40,000 units of the part:
Direct materials ..... $ 7.00
Direct labor ........ 9.00
Variable overhead .... 3.00
Fixed overhead ..... 5.00
Total cost ........ $24.00
The fixed overhead of $5 per unit includes a $1.70 per unit allocation for salary paid to a supervisor to oversee production of the part. The fixed costs would not be reduced by outsourcing, except the supervisor would be terminated. Assume that if Sunshine outsources, its purchase price from the supplier is $18 per unit.
1. Should Sunshine outsource?
2. Assume Sunshine has received a special order for 12,000 units of the part from Express, Co.
Express will pay Sunshine $28 per part, but will take the parts only if they have been manufactured by Sunshine. Thus, Express will engage in the special order only if Sunshine does not outsource any of its production. Should Sunshine accept the special order?