ProMech Components $($Pty$)$ Ltd is a South African engineering firm that manufactures precision parts for the automotive industry. One of its divisions currently produces a key component used in assembling hydraulic systems. The division manufactures $5,000$ units per year of this component.

Management is reviewing cost efficiency across all business units and has initiated discussions with an external supplier to explore the possibility of outsourcing the production of this component. This is part of ProMech's broader strategy to streamline operations and focus on core competencies.

The internal production cost structure for the component is as follows:

Cost R

Direct material

Direct labour

Variable overheads $($utilities$)$

$50000$

Fixed overheads

$250000$

Allocated overheads

If ProMech decides to outsource the production of the component, the external supplier has proposed to supply the $5,000$ units at a cost of R$300$ per unit. In this scenario, ProMech would be able to retrench the internal workforce responsible for manufacturing the component, effectively eliminating the associated direct labour costs. In addition, the variable overheads related to utilities and other production$-$linked expenses would no longer be incurred. Furthermore, fixed overheads would be reduced by $25\%$ as a result of decreased factory utilization. However, it is important to note that the allocated overheads will remain unchanged, as they are not directly attributable to the manufacture of this specific component and therefore cannot be eliminated through outsourcing.

$2$

Marks

:You are required to prepare a detailed report for senior management at ProMech Components $($Pty$)$ Ltd$..$

Your report should address the following:

Determine the relevant costs

Calculate the cost of manufacturing

A comparison of the two alternatives

Non$-$financial considerations

Report structure and presentation

b$)$ Present the report to management Communication and clarity