Joe Smith has owned and operated Smith's Tool and Die for 40 years. Currently, he is only making one part, RL-5 which is a small electrical relay. He has a 2-year contract to provide 30,000 parts per month to Ford Motor. Unfortunately, Joe got quite sick and his son, Mike, has had to come in and run the business. Mike is disappointed when he finds the following monthly information about the RL-5 part Per unit 30,000 units Sales Price: $ 22.00 660,000 Variable manufacturing costs $ 14.00 420,000 Variable selling costs $ 2.00 60,000 Fixed manufacturing overhead 150,000 Fixed administrative/selling costs 60,000 Operating income (30,000) Smith’s Tool and Die has the capacity to produce 100,000 units of the RL-5 part per month. Mike comes to you to see what can be done about the current losses Smith’s Tool and Die is experiencing. Mike is thinking about shutting down the business. Since he needs to honor his contract with Ford, he has investigated outsourcing the part to Fred’s Tool and Die. Fred offers to make the 30,000 parts per month for a price of $20 per unit. Outsourcing the part will reduce fixed manufacturing overhead by $80,000 and fixed administrative and selling costs by $30,000 How much profit/loss will Mike realize if he decides to outsource the part to Fred’s Tool and Die? Show computations Make Costs/revenues (list individually) inhouse Outsource Difference Are there any qualitative issues mike should consider before outsourcing the part?
Joe Smith has owned and operated Smith's Tool and Die for 40 years. Currently, he is only making one part, RL-5 which is a small electrical relay. He has a 2-year contract to provide 30,000 parts per month to Ford Motor. Unfortunately, Joe got quite sick and his son, Mike, has had to come in and run the business. Mike is disappointed when he finds the following monthly information about the RL-5 part
|
Per unit |
30,000 units |
|
|
Sales Price: |
$ 22.00 |
660,000 |
|
Variable |
$ 14.00 |
420,000 |
|
Variable selling costs |
$ 2.00 |
60,000 |
|
Fixed manufacturing |
|
150,000 |
|
Fixed administrative/selling costs |
|
60,000 |
|
Operating income |
(30,000) |
Smith’s Tool and Die has the capacity to produce 100,000 units of the RL-5 part per month.
Mike comes to you to see what can be done about the current losses Smith’s Tool and Die is experiencing.
Mike is thinking about shutting down the business. Since he needs to honor his contract with Ford, he has investigated outsourcing the part to Fred’s Tool and Die. Fred offers to make the 30,000 parts per month for a price of $20 per unit. Outsourcing the part will reduce fixed manufacturing overhead by $80,000 and fixed administrative and selling costs by $30,000
How much
Show computations
|
Make |
|||
|
Costs/revenues (list individually) |
inhouse |
Outsource |
Difference |
Are there any qualitative issues mike should consider before outsourcing the part?
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