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Outsourcing decisions

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

(a) What assumptions 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?
(c) What other factors are relevant to this decision?

Direct Materials $23.40
Direct Labor $16.10
Variable Overhead $26.70
Fixed Overhead $ 6.90
Total Costs $73.10

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Kane should outsource this production because outsourcing will be cheaper for the company. Even the variable overheads, direct materials and labor combined together are higher as compared to the pricing of ...

Solution Summary

Evaluates outsourcing decision for a manufacturing firm.

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Salvo Corporation Outsourcing Decisions: Relevant Factors

Salvo Corporation produces cast metal parts used in the plumbing industry. The company is organized into two divisions, mining and casting. Managers of the two divisions are evaluated based on divisionsl ROI.

The mining division sells ore to the casting division as well as to external customers. Currently, the mining division has excessive inventory and has reduced production becuase of weak demand for its product.

In effort to reduce material costs, the material costs, the manager of the casting division obtained bids for the external suppliers to provide the ore. Some external bids were below the prices charged by the mining division at salvo. making purchasing from external sources appear attractive.

A) Identify the relevant facts for the outsourcing decision.
B) Explain why purchasing the ore from an outside company may not be the best decision for salvo.
C) how would capacity and market conditions affect the outsourcing decisions?

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