Avery is under intense cost competition. As the managementaccountant for Avery, you have been asked to evaluate whether they should continue to manufactureone of its many products or purchase it from Marley Company. Marley has submitted a bid to supply the 32,000 units that are expected to be required in 2009 at a price of$17.30 each. Current capacity is available to support annual production of 32,000units.
From plant records and interviews with the plant manager, you havegathered the following information regarding Avery's costs to manufacture 30,000 units of the product in 2008:
Direct Materials $ 195,000
Direct Manufacturing Labour 120,000
Plant Space Rental 84,000
Equipment Leasing 36,000
Other Manufacturing Overhead 225,000
Total Manufacturing Costs $ 660.000
Additionally, you are aware that:
Variable costs per unit in 2009 will be the same as variable costsper unit in 2008.
• Plant rental and equipment lease are annual contracts thatare going to be expensive to terminate and it is expected that it will cost $10,000 for theplant rental contract and $5,000 to terminate the equipment-lease contract.
• 40% of the other manufacturing overhead is variable,proportionate to the direct manufacturing costs. The fixed component of other manufacturingoverhead is expected to remain the same whether the product is manufactured by Avery oroutsourced to
Marley
• Avery's just-in-time policy means that inventory isnegligible.
Required:
1. On the basis of the material and labor cost estimates originally compiled with the Plant Manager's help, should you recommend that the product be producedat Avery or purchased from Marley? Show your calculations.
2. What other factors should you examine before recommending whether Avery should manufacture or outsource the product?