Reference no: EM132835353
Question - Reliable Enterprises makes circuit boards with the following cost structure based on a volume of 30,000 units from last year:
Direct Materials $5
Direct Labour $4
Material costs are expected to increase 2% next year. Labour costs are expected to increase 5% next year.
Variable overhead is estimated to be half of the direct labour costs.
An offer has been received from PartsCo to supply 25,000 units at $17 per unit, that Reliable estimates it will need next year.
Reliable is currently leasing factory equipment for $180,000 per year to manufacture the circuit boards.
If they break their lease there is a $12,000 termination penalty.
Required -
a) From a financial perspective, determine whether Reliable Enterprises should accept the outsourcing offer.
b) At what volume of activity (in units) will Reliable Enterprises be indifferent to making or buying the circuit board?
c) Over what volume of activity will Reliable Enterprises favour buying the circuit board?
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