Make or Buy examples:
The first of these examples is more difficult than the second, however the explanation is more in depth.
1) ‘Chocolate’ company produces a component whose volume is equal to 2000 units per year. Total costs have been
collected and are as followed:
Raw Materials $35,000
Direct Labour (3 operative workers) $60,000
Indirect Employee (supervisor/manager) $30,000
Machine Depreciation $25,000
Machine Energy Consumption $7,000
Administrative expenses allocated to department $11,000
TOTAL ANNUAL COSTS $168,000
‘Vanilla’ company produces the same component at a price of $60 per unit. Knowing that in the case of outsourcing:
- cost assumption: the 3 operative workers are paid the same ($20000 each)
- worker 1 can not be moved to another department
- worker 2 can obtain the ‘unemployment insurance’
- worker 3 and the supervisor can be moved to another department with a part-time contract at a 50% level of their
current salaries
- the machinery can no be moved to another department nor can be sold
- with the resources let free due to outsourcing, the company can obtain an incremental annual margin of $10000
Would you suggest to the administrator to continue to make the component or to outsource its production?
The first of these examples is more difficult than the second, however the explanation is more in depth.
1) ‘Chocolate’ company produces a component whose volume is equal to 2000 units per year. Total costs have been
collected and are as followed:
Raw Materials $35,000
Direct Labour (3 operative workers) $60,000
Indirect Employee (supervisor/manager) $30,000
Machine Depreciation $25,000
Machine Energy Consumption $7,000
Administrative expenses allocated to department $11,000
TOTAL ANNUAL COSTS $168,000
‘Vanilla’ company produces the same component at a price of $60 per unit. Knowing that in the case of outsourcing:
- cost assumption: the 3 operative workers are paid the same ($20000 each)
- worker 1 can not be moved to another department
- worker 2 can obtain the ‘unemployment insurance’
- worker 3 and the supervisor can be moved to another department with a part-time contract at a 50% level of their
current salaries
- the machinery can no be moved to another department nor can be sold
- with the resources let free due to outsourcing, the company can obtain an incremental annual margin of $10000
Would you suggest to the administrator to continue to make the component or to outsource its production?
