Tamworth Truck manufactures part YYY used in several of its truck models. 10,000 units are produced each year with production costs as follows:
Direct materials $ 45,000
Direct manufacturing labour 15,000
Variable support costs 35,000
Fixed support costs 25,000
Total costs $120,000
Tamworth Truck has the option of purchasing part YYY from an outside supplier at $11.20 per unit. If part YYY is outsourced, 40% of the fixed costs cannot be immediately converted to other uses (i.e. cannot be avoided).
a. Describe ‘avoidable' costs. What amount of the YYY production costs is avoidable?
b. Should Tamworth Truck outsource YYY? Why or why not?
c. What other items should Tamworth Truck consider before outsourcing any of the parts it currently manufactures?