The business situation relates to the same company (Essential Beauty Group). You are a management accountant practicing independently as a freelance consultant. You are hired as a consultant by the management of Essential Beauty Group evaluate whether to outsource the production of a component D32 or should continue to manufacture in house in the upcoming year.

The component D32 is used in Essential Beauty Group’s best-selling electric shaver. The outsourcing vendor quote is the bid price off 225 per unit of D32 for the upcoming year. Based on the estimates of the marketing department regarding the number of electric shavers to be sold in the upcoming year, the production manager estimates the consumption of 40,000 units of D32. Laura (the manager of Accounting and Finance department of Essential Beauty Group) informed you that during the current year 36,000 units of D32 were produced. Laura provided you with the following cost information pertaining to D32 for the current year.

Particulars Amount (₹)

Direct material cost 3,397,500

Direct labour cost 1,647,000

Manufacturing overheads (other than leases) 2,372,000

Lease rent for space and production equipment 1,560,000

Administrative overheads 623,000

You also gather further information relevant to D32 as applicable for the forthcoming year: Direct material prices and direct labour rate are expected to increase by 6% and 5% respectively. Leases can be terminated, but the cost of termination will be equivalent to 4 weeks rent. Lease rentals are static over the years for the next three yea)rs. Space and production equipment have sufficient idle capacity to absorb the increase in production. 60% and 30% of the manufacturing overhead and administration overhead are variable in nature respectively. Rest is fixed and unavoidable. variable overhead costs are expected to increase by 3% due to the inflation effect. Direct material and labour costs are directly proportional to the volume of production.

Required: (1) Prepare a report to the management of Essential Beauty Group advising them whether to outsource or to produce D32 in house. In your report, show the calculations on the basis of which you are advising the management.

(2) Discuss five non-financial considerations that you believe the management should consider for making a final decision regarding the outsourcing of D32.

Answer rating: 100% (QA)

Question 1 A Relevant costs are to be considered for decisionmaking Relevant costs are those future ... View the full answer