Klink-A-Dink Ltd is thinking of doing some outsourcing of components for its bic

Question

Klink-A-Dink Ltd is thinking of doing some outsourcing of components for its bicycles. They have an offer from a very reputable supplier to sell them one component for $22. they need 100,000 component parts a year. That component parts a year. That component is carried in inventory at $29, as follows: the maintenance costs are a fixed contract with an outside vendor. The contract is cancellable at any time. The Fixed Overhead is 40% attributable to general factory overhead, with the rest coming from the salary of a production manager. The production manager will be let if the components are outsourced. Show CLEARLY the calculations supporting the decision to outsource the part for $22 or to keep making it internally.

Explanation / Answer

Calculations supporting the decision to outsource the part for $22 or to keep making it internally is as shown below:

Klink-a-Dink-lts should purchase the component from outside as they are saving $300,000 when they purchase component from outside.

Manufacturing Costs Purchase Costs 100,000 bicycles 100,000 bicycles Particulars Amount ($) Amount ($) Purchasing costs 100,000*22 22,00,000 Material 100,000*6 6,00,000 Labour 100,000*8 8,00,000 Variable overhead 100,000*2 2,00,000 Fixed overhead 100,000*4 10,00,000 4,00,000 Maintenance of equipment 100,000*3 3,00,000 0 Total 29,00,000 26,00,000

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