Question

Outsourcing (Make-or-Buy) Decision

Assume a division of Hewlett-Packard currently makes 12,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $34 per board, consisting of variable costs per unit of $24 and fixed costs per unit of $10. Further assume Sanmina Corporation offers to sell Hewlett-Packard the 12,000 circuit boards for $34 each. If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard's suppliers for $46,000 per year. In addition, $6 per unit of the fixed overhead applied to the circuit boards would be totally eliminated.

Should HP outsource this component from Sanmina Corporation?

Calculate the net advantage (disadvantage) to HP of outsourcing the component from Samina Corporation.

Use a negative sign with your answer to indicate a net disadvantage, if appropriate.

$

Answer 1

Cost of manufacture:

Cost of Manufacture
Variable Cost (12,000 * $24)	288,000
Fixed Cost (12,000 * $10)	120,000
Total cost of manufacture	408,000

　

Outsourcing cost:

Purchase Price	408,000
Add: Fixed Overhead Applied (12,000 * ($10-$6))	48,000
Less: Rental Income	-46,000
Total outsorcing cost	410,000

　

Net advantage (disadvantage) = Cost of manufacture - Outsourcing cost

Net advantage (disadvantage) = 408,000 - 410,000 = -2,000

Because the cost of outsourcing is more than the cost of manufacturing, thus HP should manufacture the circuit boards