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Question: The Strubel Company currently makes as many


The Strubel Company currently makes as many units of Part No. 789 as it needs. David Lin, general manager of the Strubel Company, has received a bid from the Gabriella Company for making Part No. 789. Current plans call for Gabriella to supply 1,000 units of Part No. 789 per year at $60 a unit. Gabriella can begin supplying on January 1, 2016, and continue for five years, after which time Strubel will not need the part. Gabriella can accommodate any change in Strubel’s demand for the part and will supply it for $60 a unit, regardless of quantity.
Jacqueline Tyson, the controller of the Strubel Company, reports the following costs for manufacturing 1,000 units of Part No. 789:

Direct materials ………………………………………………………………$26,400
Direct manufacturing labour ……………………………………………...13,200
Variable manufacturing overhead ………………………………………8,400
Depreciation on machine ………………………………………………….12,000
Product and process engineering ……………………………………….4,800
Rent ………………………………………………………………………………….2,400
Allocation of general plant overhead costs …………………………..6,000
Total costs ………………………………………………………………………$73,200

The following additional information is available:
a. Part No. 789 is made on a machine used exclusively for the manufacture of Part No. 789. The machine was acquired on January 1, 2015, at a cost of $72,000. The machine has a useful life of six years and zero terminal disposal price. Depreciation is calculated on the straight-line method.
b. The machine could be sold today for $18,000.
c. Product and process engineering costs are incurred to ensure that the manufacturing process for Part No. 789 works smoothly. Although these costs are fixed in the short run, with respect to units of Part No. 789 produced, they can be saved in the long run if this part is no longer produced. If Part No. 789 is outsourced, product and process engineering costs of $4,800 will be incurred for 2016 but not thereafter.
d. Rent costs of $2,400 are allocated to products on the basis of the floor space used for manufacturing the product. If Part No. 789 is discontinued, the space currently used to manufacture it would become available. The company could then use the space for storage purposes and save $1,200 currently paid for outside storage.
e. General plant overhead costs are allocated to each department on the basis of direct manufacturing labour dollars. These costs will not change in total. But no general plant overhead will be allocated to Part No. 789 if the part is outsourced.
Assume that Strubel requires a 12% rate of return for this project.

Required:
1. Should David Lin outsource Part No. 789? Prepare a quantitative analysis.
2. Describe any sensitivity analysis that seems advisable, but you need not perform any sensitivity calculations.
3. What other factors should Lin consider in making a decision?
4. Lin is particularly concerned about his bonus for 2016. The bonus is based on Strubel’s accounting income. What decision will Lin make if he wants to maximize his bonus in 2016?


4.99

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