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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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Solution Summary

Evaluates outsourcing decision for a manufacturing firm.

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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 provided by:
Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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