Problem 2 - Louder Company manufactures part MNO used in several of its truck mo

Question

Problem 2 - Louder Company manufactures part MNO used in several of its truck models. A total of 10,000 units are produced each year with production costs as follows:

Direct materials $ 45,000

Direct manufacturing labor 15,000

Variable support costs 35,000

Fixed support costs 25,000

Total costs $120,000

Louder Company has the option of purchasing part MNO from an outside supplier at $11.20 per unit. If MNO is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.

Question 1: What amount of the MNO production costs is avoidable? (five points)

Question 2: Should the company outsource MNO? Why or why not? (five points)

Question 3: What other items should the company consider before outsourcing any of the parts it manufactures? (five points)

Explanation / Answer

Question 1: What amount of the MNO production costs is avoidable?

Avoidable Cost

= Direct Material + Direct manufacturing labor + Variable support costs + 60% of Fixed Cost

= 45000 + 15000 + 35000 + 25000*60%

= $110000

Question 2: Should the company outsource MNO? Why or why not?

Cost of Purchase option = 11.20*10000 = 112,000

Since the purchase cost is more than avoidable cost company should not outsource the production of MNO.

Question 3: What other items should the company consider before outsourcing any of the parts it currently manufactures?

Others items to be considered before outsourcing

1)      Quality of the purchased product.

2)      Reliability of the vendor/Manfucturare supplying the product.

3)      Alternate use of resources

4)      Improtance of part MNO in the complete manufacturing cycle

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