Reference no: EM132593487

Question - Outsourcing Decision

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:

Labor $200

Materials 600

Variable overhead 100

Fixed overhead 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 cost 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.