Question: The keyboard division of XBT a personal computer manufacturing firm

The keyboard division of XBT, a personal computer manufacturing firm, fabricates 50- key key-boards for both XBT and non- XBT computers. Keyboards for XBT machines are included as part of the XBT personal computer and are also sold separately. The keyboard division is a profit center. Keyboards included as part of the XBT PCs are transferred to the PC division at variable cost ($ 60) plus a 20 percent markup. The same keyboard, when sold separately (as a replacement part) or sold for non- XBT machines, is priced at $ 100. Projected sales are 50,000 keyboards transferred to the PC division (included as part of the XBT PC) and 150,000 keyboards sold externally.
The keys for the keyboard are fabricated by XBT on leased plastic injection- molding machines and then placed in purchased key sockets. These keys and sockets are assembled into a base, and connectors and cables are attached. Ten million keys are molded each year on four machines to meet the projected demand of 200,000 keyboards. Molding machines are leased for $ 500,000 per year per machine; maximum practical capacity is 2.5 million keys per machine per year. The variable overhead account includes all of the variable factory overhead costs for both key manufacturing and assembly. Studies have shown that variable overhead is more highly correlated with direct labor dollars than any other volume measure.

Sara Litle, manager of the keyboard division, is considering a proposal to buy some keys from an outside vendor instead of fabricating them inside XBT. These keys ( which do not include the sockets) will be used in the keyboards included with XBT PCs but not in keyboards sold separately or sold to non- XBT computer manufacturers. The lease on one of XBT’s key injection- molding machines is about to expire and the capacity it provides can be easily shifted to the outside vendor.
The outside vendor will produce keys for $ 0.39 per key and will guarantee capacity of at least 2.5 million keys per year. Litle is compensated based on the profits of the keyboard division. She is considering returning one of the injection- molding machines when its lease expires and purchasing keys from the outside vendor.

a. How much will XBT save per key if it outsources the 2.5 million keys rather than producing them internally?
b. What decision do you expect Sara Litle to make? Explain why.
c. If you were a large shareholder of XBT and knew all the facts, would you make the same decision as Litle? Explain.
d. What changes in XBT’s accounting system and/ or organizational structure would you suggest, given the facts of the case? Explainwhy.
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  • CreatedDecember 15, 2014
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