Outsourcing Decision 3. The Coil Company manufactures 10,000 rolls of cable each

Question

Outsourcing Decision 3.

The Coil Company manufactures 10,000 rolls of cable each period. The cable is used as an input for producing several other products that Coil manufactures. The full manufacturing costs for a batch of 100 rolls of cable are: Direct materials $170 Direct labor 100 Variable manufacturing overhead 100 Average fixed manufacturing overhead 175 Total $545 The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the cable. These assets have no other use than for the manufacturing of the cable. An outside supplier has offered to sell Coil the 10,000 rolls of cable necessary to meet production needs this period for a lump-sum of $45,000.

If Coil accepts this outside supplier’s offer, how much better or worse off will the company be?

Explanation / Answer

Variable cost of manufacturing

Variable cost per roll = $3.70

So cost of 10,000 rolls = $37,000

Price offered by outside manufacture -= $45,000

the Coil will be worse by $8,000

Direct materials $170 Direct labor $100 Variable manufacturing overhead $100 Total varaible cost per 100 roll $370

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