Question

Outsourcing (Make-or-Buy) Decision Assume a division of HP Inc. currently makes 50,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $50 per board, consisting of variable costs per unit of $35 and fixed costs per unit of $15. Further assume Sanmina Corporation offers to sell HP the 50,000 circuit boards for $50 each. If HP accepts this offer, the facilities currently used to make the boards could be rented to one of HP's suppliers for $75,000 per year. In addition, 58 per unit of the fixed overhead applied to the circuit boards would be totally eliminated Support 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 for outsourcing, it appropriate $

Answer 1

Answer-

Net advantage (disadvantage)= -3000

Computations

Cost of manufacture;

Variable cost(8000*26) =208000

Fixed cost (8000*7) =56000

Total cost of manufacture =264000

Out sourcing cost

Purchase price =264000

Add: Fixed overhead applied(8000(*$7-$3) )=32000

Less: Rental income =-29000

Total outsourcing cost =267000

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

Net advantage (disadvantage) =264000-267000=-3000

The cost of outsourcing is morethan the cost of manufacturing,thus HP should manufacture the circuit boards.