Yoklic Corporation currently manufactures a subassembly for its main product. The costs per unit areas follows.
Direct materials ........................................ $ 4.00
Direct labour ............................................ 30.00
Variable overhead ...................................... 15.00
Fixed overhead (allocated) ........................... 25.00
Total .....................................................$74.00
Regina Corp has contacted Yoklic Corporation with an offer to sell it 5000 subassemblies for $55 each.
Required:
a. Why is it important to identify whether any of the fixed overhead is avoidable or unavoidable in order to assess the outsourcing of the subassembly? Explain.
b. Should Yoklic Corporation make or buy the subassemblies? Create a schedule that shows the total quantitative differences between the two alternatives. Assume all fixed overhead is unavoidable.
c. If Yoklic Corporation was able to eliminate $50 000 of fixed overhead, would it change your decision in (b) above? Explain and show your calculations.
d. What qualitative factors should the accountants and managers of Yoklic Corporation consider in their make or buy decision?