Make or Buy / Add or Delete and Competitive Pricing and Bidding

Jamie is a manager of In-Flight services in Tiger Airways. He supervises the food and beverages section. Jamie is faced with a decision to make with regards to making desserts in house or outsourcing the desserts from Sydney bakery. Currently, all desserts are made in the in flight kitchen. He provides you with information on the costs of making desserts in house:

	Cost per dessert ($)
Variable Costs
Direct Materials (Food and Packaging)	0.12
Direct Labour	0.08
Electricity	0.08
Fixed Costs (Allocated to products):
Supervisory Salaries	0.08
Depreciation of Kitchen Equipment	0.14
Total Cost per dessert	$0.50

The Sydney bakery has offered to supply the same desserts for $0.42. The average monthly volume of desserts is 2,000,000.

If the desserts are purchased, the in-flight kitchen will be able to save $20,000 money as fewer kitchen staff would be required. Apart from that, the freed up kitchen capacity can be used to produce additional meals which will cost $50,000 and sold to another airline for $180,000 per month.

REQUIRED:

A.    Based on the above information provided by Jamie, prepare an incremental analysis and advise whether he should continue making the dessert or outsource it to Sydney bakery. 

B.     What are some of the strategic issues the firm may face as a result of outsourcing the activity? 

C.     In deciding whether to add or delete a department or a product or undertaking price bidding, what type of information would you require for decision making and what should you avoid when using accounting data. 

D.    Suppose the In-flight kitchen has spare capacity and is able to produce additional desserts for sale to other businesses. Using a simple cost plus pricing (both absorption and variable costing) technique, calculate the selling price per unit if 30% is the markup.