The Canadian Division (hereafter, CD) of Bobble Technical Devices (BTD) manufactures parts used in BTD’s final products.

Noosh Fish of CD’s profit-planning department has been assigned the task of determining whether CD should continue to manufacture a component, ABC-1000, or purchase it from Cheeky Cat Company (CCC), an outside supplier.

CCC has submitted a bid to manufacture and supply the 50,000 units of ABC-1000 that BTD will need for 2022 at a per-unit price of $25.00. CCC has assured BTD that the units will be delivered according to BTD’s production specifications and needs. The contract price of $25.00 is applicable only in 2022 but CCC is interested in entering into a long-term arrangement beyond 2022.

Noosh has submitted the following information regarding CD’s cost to manufacture 45,000 units of ABC-1000 in 2021:

$
Direct materials	540,000
Direct labor	310,000
Factory space rental	150,000
Equipment leasing costs	90,000
Other manufacturing costs	360,000
Total manufacturing costs	1,450,000

Noosh has collected the following information related to manufacturing ABC-1000:

• Equipment leasing costs represent special equipment used to manufacture ABC-1000. CD can terminate this lease by paying the equivalent of one month’s lease payment for each of the four years left on its lease agreement.
• Forty percent of the other manufacturing overhead is considered variable. Variable overhead changes with the number of units produced, and this rate per unit is not expected to change in 2022. The fixed manufacturing overhead costs are not expected to change whether CD manufactures or purchases ABC-1000. CD can use equipment other than the leased equipment in its other manufacturing operations.
• Direct materials cost used in the production of ABC-1000 is expected to increase 5% in 2022.
• CD’s direct labor contract calls for a 6% wage increase in 2022.
• The facilities used to manufacture ABC-1000 are rented under a month-to-month rental agreement. CD would have no need for this space if it does not manufacture ABC-1000. CD can withdraw from the rental agreement without any penalty.

Qian Yang, CD divisional manager, stopped by Noosh’s office to voice her opinion regarding the outsourcing of ABC-1000. She commented, “This idea that we should stop manufacturing ABC-1000 is crazy, don’t you think? We both have friends who work on the production line, and they might lose their jobs if we outsource production to CCC. Would it be possible to make the cost analysis show that we should continue making ABC-1000. At the moment, for example, Head Office doesn’t know anything about the materials and labour increases next year. If possible, we should continue making ABC-1000 in-house.”

Required

For computational work, please round to two (2) decimal places

a. Prepare a relevant cost analysis that shows whether the Canadian Division should make ABC-1000 or purchase it from CCC for 2022. Specifically,

i.  What is the relevant cost per unit to make and the relevant cost per unit to buy externally?

ii. What is the total difference in relevant costs between the two alternatives, assuming a volume of 30,000 units?

iii. Based on your analysis, advise CD which of the two alternatives is preferable.

b. Briefly discuss THREE strategic factors that CD should consider in this decision.

c. Briefly discuss THREE ethical issues associated with Qian Yang’s request of Noosh Cat.