The management of Shatner Manufacturing Company is trying to decide whether to c
ID: 2460191 • Letter: T
Question
The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called CISCO, is a component of the company’s finished product. The following information was collected from the accounting records and production data for the year ending December 31, 2017. 1. 8,000 units of CISCO were produced in the Machining Department. 2. Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $4.80, direct labor $4.30, indirect labor $0.43, utilities $0.40. 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Direct Allocated Depreciation $2,100 $900 Property taxes 500 200 Insurance 900 600 $3,500 $1,700 All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will have to be absorbed by other production departments. 4. The lowest quotation for 8,000 CISCO units from a supplier is $80,000. 5. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,300 per year would be incurred by the Machining Department. (d) What nonfinancial factors should management consider in making its decision?
Explanation / Answer
In Addition to the comparing cost of Buying from Outside to make in house Management must consider other Non financial factors as mentioned below before taking any decision.
1 Reliability of External Supplier.: Management has to consider the reliablity of the External supplier in terms of Timely delivery, Quality of the products delivered, Whether he will be able to give the required quantity and the stability of the price of the external supplier.
2 Confidentiality: Whether there is any risk of the loss of confidentaility if the external manufacture also manufactures for other parties and speciall of competitors.
3 Customer's Satisfaction: whether the Customer prefer the Products being made by the comapny
4 Whether the Free resources generated from Buy decision from outside will able to be used in another part of the business.
5 Skills and competencies: Management has to discover whether the specialist skills are available outside or whether they will lose the benefit of specialised skills available within the organisation by taking the decision of buying from outside.
6 Is there any contractual agreement with employees or suppliers which will be affected by this decision
7 Will outsource will result in reduction of workforce then redudnacy cost should also be considered.
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