Reference no: EM132514271

One of the divisions within Rhine Autos is currently negotiating with another supplier regarding outsourcing component A that it manufactures. The division currently manufactures 10,000 units per annum of the component.

The costs currently assigned to the components are as follows:

Total costs of Producing 10,000 Components(Rs)

Direct materials 120,000

Direct labour 100,000

Variable manufacturing overhead costs 10,000

Fixed manufacturing overhead costs 80,000

Share of non-manufacturing overheads 50,000

Total costs 360,000

• The above costs are expected to remain unchanged in the foreseeable future if the Rhine Autos division continues to manufacture the components. The supplier has offered to supply 10,000 components per annum at a price of Rs 30 per unit guaranteed for a minimum of three years. If Rhine Autos outsources component A, the direct labour force currently employed in producing the components will be made redundant. No redundancy costs will be incurred. Direct materials and variable overheads are avoidable if component A is outsourced. Fixed manufacturing overhead costs would be reduced by Rs 10,000 per annum but non-manufacturing costs would remain unchanged. Assume initially that the capacity that is required for component A has no alternative use.

Required:

Question 1: Should the Division of Rhine Autos make or buy the component?