One of the divisions within Forth Motors is currently negotiating with another supplier regarding outsourcing component A that it manufactures. The division currently manufactures 10,000 units of the component per year. The costs currently assigned to the component are as follows:
Total Costs of producing 10,000 units of component
A (£)
Unit Cost (£)
Variable Costs Material X 120,000 12 Labour 100,000 10 Other variable manufacturing costs (power and utilities) 10,000 1 Fixed Costs Fixed manufacturing costs 80,000 8 Share of fixed nonmanufacturing costs 50,000 5 TOTAL COSTS 360,000 36.
The above costs are expected to remain unchanged in the foreseeable future if Forth Motors’ division continues to manufacture component A. The supplier has offered to supply 10,000 units of component A per year at a price of £30 per unit guaranteed for a minimum of 3 years. If Forth Motors outsources component A, the labor force currently employed in producing the component will be made redundant. No redundancy costs will be incurred. Material X and other variable manufacturing costs (i.e. power and utilities) are avoidable if component A is outsourced. Fixed manufacturing costs (some of which are stepped-fixed costs) would be reduced by 10,000 per year, but the share of the fixed non-manufacturing costs would remain
unchanged.
Required:
(a) Assume that the capacity that is required for component A has no alternative use. Should the division of Forth Motors make or buy the component? Provide clear workings and arguments to support your answer.
(b) Assume that the extra capacity that will be made available from outsourcing component A can be used to manufacture and sell 10,000 units of component Z at a price of £34 per unit. All of the labour force required to manufacture component A would be used to make component Z. The other variable manufacturing costs, the fixed manufacturing costs and the share of the fixed nonmanufacturing costs would be the same as the costs incurred to manufacture component A. Material X used to manufacture component A would not be required, but additional Material Y required for making component Z would cost £13 per unit. Should Forth Motors outsource component A? 

Provide clear workings and arguments to support your answer.

Answer rating: 100% (QA)

a Cost to buy 1000030 300000 LessSavings in cost due to buying Material X ... View the full answer