Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 11,300 components are as follows: Material cost Labor cost Overhead Batch-level set-up costs for year $7 per unit $3 per unit $1 per unit $ 5,700 Product-level manager's salary Allocated facility-level costs $ 17,700 $11,700 An outside company has offered to supply 11,300 units of the component for $14.40 each. If the company outsources the component, it will be able to rent out the idle factory space for $2,000 per month but will not terminate the product manager.
Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 11,300 components are as follows: Material cost Labor cost Overhead Batch-level set-up costs for year $7 per unit $3 per unit $1 per unit $ 5,700 Product-level manager's salary Allocated facility-level costs $ 17,700 $11,700 An outside company has offered to supply 11,300 units of the component for $14.40 each. If the company outsources the component, it will be able to rent out the idle factory space for $2,000 per month but will not terminate the product manager.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Step 1: Define 'Decision making':
VIEWStep 2: (a) Determine the items are not relevant to this outsourcing decision:
VIEWStep 3: (b) Determine the opportunity costs associated with this decision:
VIEWStep 4: (c) Prepare a quantitative analysis that indicates whether the component should be outsourced:
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