Case A One of the divisions within Rhine Autos is currently negotiating with another supplier regarding outsourcing comp

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Case A One Of The Divisions Within Rhine Autos Is Currently Negotiating With Another Supplier Regarding Outsourcing Comp 1 (158.01 KiB) Viewed 54 times

Case A One of the divisions within Rhine Autos is currently negotiating with another supplier regarding outsourcing component A that it manufactures. The division currently manufactures 10 000 units per annum of the component. The costs currently assigned to the components are as follows: Unit cost Total costs of producing 10000 components (£) 120 000 100 000 12 10 Direct materials AB Direct labour Variable manufacturing overhead costs (power and utilities) Fixed manufacturing overhead costs Share of non-manufacturing overheads Total costs 10 000 80 000 50 000 360 000 1 8 5 36 The above costs are expected to remain unchanged in the foreseeable future if the Rhine Autos division continues to manufacture the components. The supplier has offered to supply 10000 components per annum at a price of £30 per unit guaranteed for a minimum of three years. If Rhine Autos outsources component A, the direct labour force currently employed in producing the components will be made redun- dant. No redundancy costs will be incurred. Direct materials and variable overheads are avoidable if com- ponent A is outsourced. Fixed manufacturing overhead costs would be reduced by £10 000 per annum but non-manufacturing costs would remain unchanged. Assume initially that the capacity that is required for component A has no alternative use. Should the division of Rhine Autos make or buy the component? Case B Assume now that the extra capacity that will be made available from outsourcing component A can be used to manufacture and sell 10 000 units of component Z at a price of £34 per unit. All of the labour force required to manufacture component A would be used to make component Z. The variable manufacturing overheads, the fixed manufacturing overheads and non-manufacturing overheads would be the same as the costs incurred for manufacturing component A. Materials AB required to manufacture component A would not be required but additional materials XY required for making component Z would cost £13 per unit. Should Rhine Autos outsource component A?