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problem 1: One of the divisions in Acme Manufacturing Company is presently negotiating with the other supplier regarding outsourcing component A that it manufactures. The division presently manufactures 10,000 units per annum of the component. The costs presently assigned to the components are as shown below:

                                                               Total costs of Producing 10,000
                                                                        Components (Rs)
Direct materials                                                   120,000
Direct labor                                                         100,000
Variable manufacturing overhead costs                  10,000
Fixed manufacturing overhead costs                      80,000
Share of non-manufacturing overheads                  50,000
Total costs                                                         360,000

The above costs are expected to remain unchanged in the foreseeable future if the Acme Manufacturing Company continues to manufacture the components. A supplier has offered to supply 10,000 components per annum at a price of Rs 30 per unit guaranteed for a minimum of three years.

If Acme Manufacturing Company outsources component A, the direct labor force presently employed in producing the components will be made redundant. No redundancy costs will be incurred. Direct materials and variable overheads are avoidable if component A is outsourced. Fixed manufacturing overhead costs would be decreased by Rs 10,000 per annum however non-manufacturing costs would remain unchanged. Suppose initially that the capacity that is needed for component A has no alternative use.

Required: Should the Division of Acme Manufacturing Company make or purchase the component?

problem 2: Suppose now that the extra capacity which will be made available from outsourcing component A can be used to manufacture and sell 10,000 units of part B at a price of Rs 34 per unit. All of the labor force needed to manufacture component A would be used to make part B. The variable manufacturing overhead, the fixed manufacturing overheads and the non-manufacturing overheads would be similar as the cost incurred for manufacturing component A. The materials needed to manufacture component A would not be needed however additional materials needed for making part B would cost Rs 13 per unit.

Required: Should Acme Manufacturing Company outsource the component A?

problem 3: What are the other non-financial factors which require to be considered before taking a decision apart from the financial elements?   

Cost Accounting, Accounting

  • Category:- Cost Accounting
  • Reference No.:- M96756

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