- 20 Marks
Question
SEAGULL FABRICATORS LIMITED buys a component for N280 per unit, 6,000 units of which it uses monthly. Below is the cost of making the same component in-house:
| UNIT COST (N) | TOTAL COST (N) | |
|---|---|---|
| Direct Material | 100 | 600,000 |
| Direct Labour | 100 | 600,000 |
| Variable Overheads | 50 | 300,000 |
| Total | 250 | 1,500,000 |
To be able to fabricate the component, the company needs to purchase a mould for N5,000,000 with an expected life span of five years. Also, an annual rent of N1,000,000 needs to be paid for the space needed for the fabrication. Power consumption is also expected to increase by N500,000 per year.
Required:
a. You are required to advise the company whether to discontinue the outsourcing of the component or commence local fabrication. (8 Marks)
bi. State THREE qualitative factors to be taken into consideration before a decision is taken to outsource a component hitherto fabricated in-house. (6 Marks)
ii. List THREE quantitative factors usually considered in the case referred to in (bi) above. (6 Marks)
Answer
a)
SEAGULL FABRICATORS LIMITED
COMPARATIVE STATEMENT (MONTHLY)
Based on the figures above, the company is advised to continue purchasing the component rather than in-house fabrication. It is cheaper to outsource.
b)
i. Qualitative Factors to Consider Before Outsourcing
- Quality of the Product: Ensuring the outsourced product meets the required quality standards.
- Reliability of the Supplier: The consistency and dependability of the supplier in delivering components on time.
- Impact on Workforce: Potential job losses or changes in roles for employees if production is outsourced.
ii. Quantitative Factors to Consider
- Cost Comparison: Total cost of in-house production versus the cost of outsourcing.
- Break-Even Analysis: Analysis of the point at which in-house production becomes more cost-effective than outsourcing.
- Investment in Fixed Assets: The cost of purchasing new equipment or infrastructure required for in-house production.
- Tags: Cost Analysis, Make or buy decision, Outsourcing
- Level: Level 1
- Topic: Decision-making techniques
- Series: MAY 2017
- Uploader: Kwame Aikins