Dude Skis currently has a small plastic injection molding operation in house, from which it molds the tip and tail guards for its skis. A local plastic injection molding firm visits Dude Skis and offers to produce these items for $0.41 per set. Manage ment asks the cost accountant to determine whether this will result in improved profits for the company, using the assumption that the company would sell its injection molding machine if the supplier’s offer is accepted.
According to Dude’s cost records, the cost of a set of tip and tail guards is $0.56, which is comprised of the following items:
|
Cost Items |
Direct Costs |
Overhead |
|
Resin |
$0.25 |
|
|
Color |
0.02 |
|
|
Scrap |
0.01 |
|
|
Injection molder depreciation |
0.03 |
|
|
Injection molder maintenance |
0.02 |
|
|
Injection molding labor |
0.05 |
|
|
Injection molding labor benefits |
0.01 |
|
|
Manufacturing overhead |
$0.12 |
|
|
Administrative overhead |
0.5 |
|
|
Total |
$0.39 |
$0.17 |
In the preceding table, the injection molder depreciation cost of $0.03 per unit would not have been included if the company had chosen to keep the machine. However, since it plans to sell the machine if it accepts the supplier’s offer, the depreciation is directly related to the decision, and so is a direct cost.
The costs comprising the overhead allocations will not decline if the company outsources this component, so the overhead is not a direct cost.
The table reveals that the direct costs associated with the analysis are lower than the supplier’s offered price, so the company should reject the outsourcing option and continue to produce the tip and tail guards in house. This decision is also reasonable from a risk management perspective, since Dude Skis would otherwise be permanently eliminating its capability to produce the part in house, which could potentially leave it at the mercy of any price increases later imposed by the supplier.