Question

3. Clock company Itd produces a component whose annual volume is equal to 2500 units: Raw materials Direct labor (3 operative workers) Indirect employee (supervisor/manager) Machine depreciations Machine energy consumption Administrative expenses allocated to the department $70000 $120000 $60000 $50000 $14000 $22000 TOTAL annual costs: $336000 Digitalworld company produces the same component at the unit price of $100. Knowing that in case of outsourcing: - assuming all the three operative workers have the same costs: the worker_1 can not be moved to another department;- the worker_2 can obtain the "unemployment insurance":!- the worker_3 and the supervisor can be moved to another department with a part-time contract at the 40%; -the machinery can not be moved to another department or sold; - with the resources let free due to the outsourcing process, the company can obtain an incremental annual margin of $20000; Would you suggest the administrator to continue to make the component or to outsource its production?

Answer 1

Current Cost Per Unit =336000/2500 134.4 70,000.00 40000 24000 Cost Per Unit if labour outsourced Raw materials Direct Labour Labour 1 - Full utilisation =120000/3 Labour 2 - Can be relieved Labour 3 - 60% - 40% outsourced =120000/3*60% Indirect Empolyee(Supervisor) =60000*60% Machine Depreciation Machine Energy Consumption Admi.Exp Total Annual Cost Incremental Anuual Margin by usage of free resources 64,000.00 36,000.00 50,000.00 14,000.00 22,000.00 256,000.00 20,000.00 276,000.00 Cost Per Unit after Outsourcing =276,000/2500 110.4

It can be outsourced if the outsourcing cost is less than 60,000.00