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Chapter 25: Q25-23RQ (page 1407)
What questions should managers answer when considering outsourcing?
Answer
When considering outsourcing, the manager must consider some important questions such as cost-saving, quality, thedeadline to deliver the product, impact on sales revenue, and many more.
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Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:
Direct materials \(5.00
Direct labor 3.00
Variable overhead 6.00
Fixed overhead 7.00
Manufacturing product cost \)21.00
Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch.
Brinn, located in Port St. Lucie, Florida, produces two lines of electric toothbrushes: deluxe and standard. Because Brinn can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:
Per Unit
Deluxe Toothbrush Standard Toothbrush
Sales price \(86 \)56
Variable costs 20 18
Contribution margin \(66 \)38
Contribution margin ratio 76.7% 67.9%
After expansion, the factory will have a production capacity of 4,100 machine hours per month. The plant can manufacture either 50 standard electric toothbrushes or 35 deluxe electric toothbrushes per machine hour.
Requirements
1. Identify the constraining factor for Brinn.
2. Prepare an analysis to show which product line to emphasize.
This problem continues the Piedmont Computer Company situation from Chapter 24. Piedmont Computer Company鈥檚 payroll accountant has submitted her resignation and will be leaving the company in two weeks. The company must decide if it will hire a replacement or outsource the payroll position. The current employee earns a salary of \(40,000. Medical insurance, employer payroll taxes, and contributions to the pension plan for this position cost \)7,600. The company has already invested \(22,000 in payroll software. Required annual updates to remain in compliance with all state and federal laws are \)495. The company also spends \(1,750 per year in professional development for this position to ensure the employee stays up-to-date with payroll changes. Piedmont Computer Company pays its employees weekly. Payroll Professionals will processthe company鈥檚 weekly payroll for \)1,000 per week. This fee also includes preparing all necessary payroll tax returns, reports, and W-2s.
Requirements
1. Prepare a differential analysis to determine if Piedmont Computer Company should replace the employee or outsource the payroll function.
2. What other factors should Piedmont Computer Company consider in making this decision?
What is the most common constraint faced by merchandisers?
Elm Petroleum has spent \(204,000 to refine 61,000 gallons of petroleum distillate, which can be sold for \)6.30 per gallon. Alternatively, Elm can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost \(1.80 per gallon of distillate. The cleaner fluid can be sold for \)9.10 per gallon. To sell the cleaner fluid, Elm must pay a sales commission of \(0.10 per gallon and a transportation charge of \)0.16 per gallon.
Requirements
1. Diagram Elm鈥檚 decision alternatives, using Exhibit 25-18 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Elm鈥檚 decision?
3. Should Elm sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
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