2 Suppose that the contract cannot be accepted for financial reasons. Could outsourcing be a good solution if JB wants to meet the demand of the aircraft manufacturer? DisCUss briefly on three factors (of any kind) that management ought to consider and which may influence their decision.
2 Suppose that the contract cannot be accepted for financial reasons. Could outsourcing be a good solution if JB wants to meet the demand of the aircraft manufacturer? DisCUss briefly on three factors (of any kind) that management ought to consider and which may influence their decision.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:JB Limited is a small specialist manufacturer of electronic components and much of its output is used by
the makers of aircraft for both civil and military purposes. One of the few aircraft manufacturers has offered
a contract to JB Limited for the supply, over the next months, of 400 identical components.
The data related to the production of each component are as follows:
O Material requirements
3 kg material M1: see note 1
2 kg material P2: see note 2
1 part N° 678: see note 3
Note 1: Material M1 is in continuous use by the company. 1000Okg are currently held in stock at a book value
of £4.70 per kg, but it is known that the current purchase price is £5.50 per kg.
Note 2:1 200 kg of material P2 are held in stock. The original cost of this material was £4.30 per kg, but as
this material has not been required for the last two years it has been written down to £1.50 per kg scrap
value. The only foreseeable alternative use is as a substitute for material X4 (in current use), but this would
involve further processing costs of £1.60 per kg. The current purchase price of material X4 is £3.60 per kg.
Note 3: Part N° 678 is not in stock. This material should be bought in bulk at a price of £25 000 for 750 units
N° 678. There is no foreseeable alternative use for the oversupply.
(i) Labour requirements
Each component would require 5 hours of skilled labour and five hours of semi-skilled. Skilled workers have
a fixed contract and earn a fixed wage. Semi-skilled workers are paid on an hourly basis. It is impossible to
hire new skilled workers, due to scarcity on the labour market. Consequently, 409% of the hours necessary to
execute the special contract, will happen by means of overtime (the remaining 60% will exploit the
available excess capacity). A skilled worker is paid £25 per hour, the premium for overtime is 35% of the
normal wage rate. The current rate for semi-skilled workers is £10 per hour and an additional worker could
be appointed fort his work.
(i) Overhead
The production overhead is allocated by number of machine hours, currently £20 per machine hour, of
which £7 is for variable overhead and £13 for fixed overhead. If this contract is undertaken it is estimated
that fixed costs will increase for the duration of the contract by £ 3 200. Spare machine capacity is available
and each component would require 4 machine hours.
Concerning the non-production overhead, JB is used to allocate £1000 of the existing fixed administrative
costs to an order of this size.
A price of £250 per component has been suggested by the large company which makes aircraft.
REQUIRED:
Transcribed Image Text:2.
Suppose that the contract cannot be accepted for financial reasons. Could outsourcing be a good
solution if JB wants to meet the demand of the aircraft manufacturer? Discuss briefly on three factors (of
any kind) that management ought to consider and which may influence their decision.
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