Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 10,000 components are as follows:
$\begin{array}{lc}
\text { Material cost } & \$ 5 \mathrm{per} \text { unit } \
\text { Labor cost } & \$ 4 \text { per unit } \
\text { overhead } & \$ 1 \mathrm{per} \text { unit }\
\text { Batch-level set-up costs for year } & \$ 5,000 \
\text { Product-level manager's salary } & \$ 18,000 \
\text { Allocated facility-level costs } & \$ 12,000
\end{array}$ An outside company has offered to supply 10,000 units of the component for $12.50 each. If the company outsources the component, it will be able to rent out the idle factory space for $1,000 per month but will not terminate the product manager.Required:Which items are not relevant to this outsourcing decision?Identify any opportunity costs associated with this decision.Prepare a quantitative analysis that indicates whether the component should be outsourced.

Question

Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 10,000 components are as follows:
 $\begin{array}{lc}
\text { Material cost } & \$ 5 \mathrm{per} \text { unit } \
\text { Labor cost } & \$ 4 \text { per unit } \
\text { overhead } & \$ 1 \mathrm{per} \text { unit }\
\text { Batch-level set-up costs for year } & \$ 5,000 \
\text { Product-level manager's salary } & \$ 18,000 \
\text { Allocated facility-level costs } & \$ 12,000
\end{array}$ An outside company has offered to supply 10,000 units of the component for $12.50 each. If the company outsources the component, it will be able to rent out the idle factory space for $1,000 per month but will not terminate the product manager.Required:Which items are not relevant to this outsourcing decision?Identify any opportunity costs associated with this decision.Prepare a quantitative analysis that indicates whether the component should be outsourced.

Quizplus · Accepted Answer

The Answer of Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 10,000 components are as follows:
 $\begin{array}{lc}
\text { Material cost } & \$ 5 \mathrm{per} \text { unit } \
\text { Labor cost } & \$ 4 \text { per unit } \
\text { overhead } & \$ 1 \mathrm{per} \text { unit }\
\text { Batch-level set-up costs for year } & \$ 5,000 \
\text { Product-level manager's salary } & \$ 18,000 \
\text { Allocated facility-level costs } & \$ 12,000
\end{array}$ An outside company has offered to supply 10,000 units of the component for $12.50 each. If the company outsources the component, it will be able to rent out the idle factory space for $1,000 per month but will not terminate the product manager.Required:Which items are not relevant to this outsourcing decision?Identify any opportunity costs associated with this decision.Prepare a quantitative analysis that indicates whether the component should be outsourced.

Sherman Manufacturing Company Currently Manufactures a Component Used in One