XYZ, Inc., Company currently manufactures doors used in the production of custom homes. Management is interested in outsourcing production of the doors to a reputable manufacturing company that can supply the doors for P90 per unit. Vail incurs the following annual production costs to produce 3,000 doors internally.
Per Unit
Total
Variable Production Costs:
Direct Materials
P30
P90,000
Direct Labor
15
45,000
Manufacturing OH
20
60,000
Fixed Production Costs:
Factory Building Lease
80,000
Equipment Lease
40,000
Factory Insurance
25,000
Production Supervisor’s Salary
90,000
Total
430,000
If production is outsourced, all variable production costs, equipment lease costs, and factory insurance costs will be eliminated. The production supervisor’s salary cost will remain regardless of the decision to outsource or to produce internally because the supervisor recently signed a long-term contract with the company. The factory lease has five years remaining and cannot be terminated before then.
Required:
a. How much is the net advantage (disadvantage) of outsourcing?
b. At what number of units will you be indifferent between outsourcing and making it in-house?
c. Assuming the factory can be leased to another party for P60,000 until the contract runs out, which is now a better alternative? How much is its advantage?
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