CASE A

One of the divisions within Rhine Autos is currently negotiating with another supplier regarding outsourcing component A that it manufactures. The division currently manufactures 10 000 units per annum of the component. The costs currently assigned to the components are as follows:

Total costs of

producing 10 000

Unit

components

cost

(£)

(£)

Direct materials

120 000

12

Direct labour

100 000

10

Variable manufacturing overhead costs (power and utilities)

10 000

1

Fixed manufacturing overhead costs

80 000

8

Share of non-manufacturing overheads

50 000

5

Total costs

360 000

36

The above costs are expected to remain unchanged in the foreseeable future if the Rhine Autos division continues to manufacture the components. The supplier has offered to supply 10 000 components per annum at price of £30 per unit guaranteed for a minimum of three years. If Rhine Autos outsources component A the direct labour force currently employed in producing the components will be made redundant. No redundancy costs will be incurred. Direct materials and variable overheads are avoidable if component A is outsourced. Fixed manufacturing overhead costs would be reduced by £10 000 per annum but non-manufacturing costs would remain unchanged. Assume initially that the capacity that is required for component A has no alternative use. Should the Division of Rhine Autos make or buy the component?

CASE B

Assume now that the extra capacity that will be made available from outsourcing component A can be used to manufacture and sell 10 000 units of part B at a price of £34 per unit. All of the labour force required to manufacture component A would be used to make part B. The variable manufacturing overheads, the fixed manufacturing overheads and non-manufacturing overheads would be the same as the costs incurred for manufacturing component A. The materials required to manufacture component A would norbe required but additional materials required for making part B would cost £13 per unit. Should Rhine Autos outsource component A?