Outsourcing Decision
Response to the following problem:
Bendix Ltd. is considering the alternatives of either outsourcing component VX-1 to an outside supplier or producing the component itself. Production costs to Bendix are estimated as follows:
Labour Materials Variable Overhead Fixed overhead
$ 200
600
100
300
Total $1,200
An outside supplier, Cosmo PLC, has quoted a price of $1,000 for each VX-1 for an order of 100 of these components. However, if Bendix accepts the quote from Cosmo, the company will need to give three months' notice of redundancy to staff.
a. Calculate the relevant costs of the alternative choices (show your work) and make a recommendation to management about which choice to accept.
b. How would your recommendation differ if Bendix employees were on temporary contracts with no notice period?
c. Explain the significance of an inventory valuation of $1,300 for the VX-1 at the end of the last accounting period.