Company XYZ is considering outsourcing their Product A. Facts: 1) Product A make

Question

Company XYZ is considering outsourcing their Product A.

Facts:

1) Product A makes up 30% of a companies sales revenue and production volume
2) By reducing sales price 5%, can increase unit sales volume by 15%
3) Product A sales were $27 million last year
4) Direct material costs for Product A were $14.3 million and overhead costs were $4.2 million
5) If product is outsourced, only $2.9 million overhead will be avoided
6) Direct selling costs are 8% commission to sales reps, and $2 million advertising
7) Layoffs due to outsourcing will include 3 admin managers (saving $135,000), 8 admin support staff (saving $256,000), 10 supervisors (saving $500,000), and 128 production personnel (saving $4,736,000).
8) XYZ will incur one-time charge of $1 million for severance pay for dismissed employees
9) XYZ will need to spend $200,000 for construction of receiving facilities for outsourced product

CURRENT:

All Products
Sales 90.2
COGS 74.3
Gross Margin 15.9
Admin Costs 1.6
Selling Costs 11.2
Net Income 3.1

Product A Only
Sales 27
COGS 18.5
Gross Margin 8.5

IF PRODUCT A OUTSOURCED:
Material costs 14.6
Labor 2.1
Overhead 2.7
Other 1.5
20.9
Markup 10% 2.1
Transportation 0.6
Total Cost 23.6

QUESTIONS:

1) IF Company XYZ chooses to outsource Product A, what would be the expected Net Income for the company?
2) What would be the Gross profit margin for Product A?

Explanation / Answer

(1) Computation of the expected net income for the company if company XYZ chooses to outsource product A.We have,

(2) Computation of the gross profit margin for product A.We have,

Particulars Amount(Million $) Sales 90.2 - 27.0 + ( 27 + 27*15% - 27*5%) 92.7 Less: COGS 74.3 - 18.5 + 1.3 + 23.6 + 1.2 - 4.7 77.2 Gross Margin 15.5 Less: Admin Cost 1.6 - 0.90 0.70 Less: Selling cost 11.2 - ( 27*8% + 2.0) 7.04 Expected Net Income $ 7.76

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