Sherman Manufacturing Company currently manufactures a component used in one of its products.The annual production costs for 10,000 components are as follows:
$\begin{array}{lrr}
\text { Material cost} &\$5\text { per unit }\
\text { Labor cost} &\$4 \text { per unit }\
\text {Overhead } &\$1 \text { per unit }\
\text {Batch-level set-up costs for year } &\$ 5,000\
\text { Product-level manager's salary } & \$ 18,000\
\text { Allocated facility-level costs } & \$12,000\
\end{array}$
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:
1)Which items are not relevant to this outsourcing decision?
2)Identify any opportunity costs associated with this decision.
3)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:
 $\begin{array}{lrr}
  \text {  Material cost} &\$5\text { per unit }\
 \text {  Labor cost} &\$4 \text { per unit }\
 \text {Overhead  } &\$1 \text { per unit }\
 \text {Batch-level set-up costs for year  } &\$ 5,000\
 \text { Product-level manager's salary } & \$ 18,000\
 \text { Allocated facility-level costs } & \$12,000\
\end{array}$
 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:
1)Which items are not relevant to this outsourcing decision?
2)Identify any opportunity costs associated with this decision.
3)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:
 $\begin{array}{lrr}
  \text {  Material cost} &\$5\text { per unit }\
 \text {  Labor cost} &\$4 \text { per unit }\
 \text {Overhead  } &\$1 \text { per unit }\
 \text {Batch-level set-up costs for year  } &\$ 5,000\
 \text { Product-level manager's salary } & \$ 18,000\
 \text { Allocated facility-level costs } & \$12,000\
\end{array}$
 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:
1)Which items are not relevant to this outsourcing decision?
2)Identify any opportunity costs associated with this decision.
3)Prepare a quantitative analysis that indicates whether the component should be outsourced.

Sherman Manufacturing Company Currently Manufactures a Component Used in One