Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs
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Question:
Sherman Manufacturing Company currently manufactures a component used in one of its products.
The annual production costs for 10,000 components are as follows:
Material cost $5 per unit
Labor cost $4 per unit
Overhead $1 per unit
Batch-level set-up costs for the year $5,000 Product-level manager's salary $18,000 Allocated facility-level costs $12,000.
An outside company has offered to supply 10,000 units of the component for $12.50 each. If the company outsources the component, it will be able to rent out the idle factory space for $1,000 per month but will not terminate the product manager.
Required:
a) Prepare a quantitative analysis that indicates whether the component should outsources.
b) What qualitative factors should be considered in this decision.
Related Book For
Cornerstones of Cost Management
ISBN: 978-1285751788
3rd edition
Authors: Don R. Hansen, Maryanne M. Mowen
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