You are the cost accountant of a manufacturing company. The top management seeks your assistance in arriving at a decision whether to continue manufacturing a part or to buy it from an outside supplier. The part is a component used in several of the company’s finished products.
The following data have been arrived at on the basis of cost records and further investigation:
1. The annual requirement is 40,000 units.
2. The lowest list price quotation from a supplier was `27.50 per unit.
3. Following are the total costs incurred last year, when 40,000 parts were produced in Department A of the company
4. The following proportions (percentages) of the variable costs in Department A could be avoided if production of parts was discontinued: Materials, 35; Direct labour, 40; Power, 25.
5. If parts are purchased from an outside supplier, average freight cost is `0.50 per unit. Also, indirect labour in Department A would increase by `30,000 annually because of receiving, inspecting and handling of the purchased parts.
On the basis of the above information, advise management on the commercial feasibility of the proposed plan