Kane company is considering outsourcing a key component. A reliable supploer has

Question

Kane company is considering outsourcing a key component. A reliable supploer has quoted a price of 64.50 per unit. The following costs of component when manufactured in house are expressed on a per unit basis:

Direct material 23.40

Direct Labor 16.10

Variable Overhead 26.70

Fixed Overhead 6.90

total cost 73.10

a.) What assumption need to be made about the behavior of overhead costs for Kane in order to analyze the outsourcing decision?

b.) Should Kane company outsource the component? Yes or no Why?

c.) What other factors are relevent to this decision? Yes or No Why?

Explanation / Answer

a) Kane need to assume that Fixed Overhead costs will remain same even in case of outsourcing b) Statement showing computations Particulars Amount Direct Material              23.40 Direct Labour              16.10 Variable Overhead              26.70 Total Relevant Costs              66.20 Yes since Outsourcing costs is $64.50 per unit and relevant cost of making is $66.20 c) Other Factors are: Economies of scale that will happen to firm in making Quality of product in making

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