Question

Global Cats Incorporated is a producer of pet accessories, focusing on felines. Up until now they have produced one of their top sellers, a scratching post. Normally they can produce 25,000 units in a period. To produce each unit they incur direct material costs of $25, direct labour of 2 hours at a rate of $15/hour, variable manufacturing overhead of $13, fixed manufacturing overhead of $40,000, and variable selling and administrative expense of $1.50.

Recently they were approached by a supplier of scratching posts that they could produce and sell scratching posts to Global Cats Inc. for $45/unit.

Ignoring qualitative issues, should Global Cats continue producing in house or outsource production? What other quantitative factors should be considered in this incremental analysis.

Answer 1

$ 25.00 Direct Material Direct Labour (2hours x $15) 30.00 $ 13.00 Variable Manufac. Overhead $ 68.00 Total Maufacturing Cost $45.00 Offered Price by Supplier As the price offered by the Supplier is lessor, it should be accepted Therefore, Global Cats Inc. should outsource the production Other factor to be considered are - Savings in avoidable fixed costs, Selling and administraion expenses, Opportunity costs, etc. though, it is assumed that selling and administration expenses will have to be incurred by Global Cats and thus not included in the cost above.

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