Required: a) Should OutTel continue to manufacture the ADM57 part or buy it? b) Would your decision in a) be different if the storage rental was still required
OutTel Ltd manufactures computer chips in its Australian factories. One of the component parts required to manufacture their computer chips is called the ADM57. Analysis of the accounting records and the production data revealed the following information for the year ending June 2020:
• The production department produced 80 000 units of ADM57.
• The cost of materials per ADM57 unit is $5.
• Eight employees are assigned to the production department and each work full-time (1920 hours per employee per year) producing the ADM57 parts. Each employee is paid $25 per hour.
• Additional
Indirect Labour 15,000
Utilities 7,000
Rates and Insurance 4,000
The management of OutTel Ltd has asked for your assistance in deciding whether to continue manufacturing the ADM57 part or to buy it from an outside supplier.
• All of the above costs will be eliminated if ADM57 is purchased.
• The lowest price for ADM57 from an outside supplier is $8.60 per unit. Delivery
costs will be $1.20 per unit, and a part-time dispatch employee at $40,000 per year will be required.
• Currently, OutTel Ltd pays storage rental for 20,000 units of its finished product at approximately $2 per unit. If ADM57 is purchased, the storage rental will not be required.
Required:
a) Should OutTel continue to manufacture the ADM57 part or buy it?
b) Would your decision in a) be different if the storage rental was still required
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