Reference no: EM132514275
(a) 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?
(b) Assume now that the extra capacity that will be made available from outsourcing component A can be used to manufacture and sell 10,000 units of part B at a price of Rs 34 per unit. All of the labour force required to manufacture component A would be used to make part B. The variable manufacturing overhead, the fixed manufacturing overheads and the non-manufacturing overheads would be the same as the cost incurred for manufacturing component A. The materials required to manufacture component A would not be required but additional materials required for making part B would cost Rs 13 per unit.
Required:
Question 2: Should Rhine Autos outsource component A? What other factors should Rhine Autos consider before taking any decision