camshaft assembly? 8-23 Outsourcing (LO 3) Benson Pr large process control syste

Question

camshaft assembly? 8-23 Outsourcing (LO 3) Benson Pr large process control system it is designir of 1,000 systems. Engineers estimate th Direct materia Direct labor Variable manu Engineers estimate that 25 weeks of development we verify the new design. Engineering resources (personnel te t will cost $3,000 per week. If the engineers don't work b assigned to another. Longan Devices has a module that is quite similar to the one Benson ne modify the device to suit Benson in just four weeks and has offered to supply it a price of $60 per unit. Required a. Should Benson go forward with its design of the new module, or should it accept Longan's offer? b. If Benson decided to outsource the new module to Longan, how much would the other projects Benson's engineers work on have to return (or save) to make outsourcing financially beneficial? 8-24 Outsourcing (LO 3) Wright Water Co. is a leading producer of greenhouse irrigation systems. Currently, the company manufactures the timer unit used in each of its systems. Based on an annual production of 50,000 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation. o $13 Direct materials Direct labor Variable manufacturing overhead Direct fixed manufacturing overhead Allocated fixed manufacturing overhead 4: 4 7, 21 (40% salaries, 60% depreciation) $37 Total unit cost Clifton Clocks has offered to provide the timer units to Wright at a price of $34 per unit. If Wright accepts the offer, the current timer unit supervisory and clerical staff will be laid off.

Explanation / Answer

allocated fixed maufacturing overhead $8 is an unavoidable fixed cost which is irreleavant for decision making , hence should be ignored.( as it will occur irrelevant of decision )

direct fixed maufacturing overhead includes salary of supervisor and clerical staff whose service will be laid off in the event of buying units from clifton clocks.Hence it is an avoidable fixed cost relevant for decision making.( since the cost will not occur if we stop manufacturing)

so as per relevant costing

cost of buying = $ 34 per unit cost of manufacturing = $ 29 per unit (13+5+4+7)

   or

As per total costing concept

cost of buying = 34+8=42 per unit cost of manufacturing = $ 37 per unit (29+8)

hence company should not accept the offer from clifton and make in house manufacturing.

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