Reference no: EM132649065

Question - Outsourcing (make or buy)

The management of SouthPak Company (southpak) has asked for your assistance in deciding whether to continue manufacturing a part or to buy it from an outside supplier. The part, called AlphaB, is a component of SouthPaks finished product. An analysis of the accounting records and the production data revealed the following information for the year ending June 2015.

1. The production department produced 70,000 units of AlphaB.

2. Six employees are assigned to the production department and work-full time (1920 hours each per year)producing AlphaB . Each employee is paid $20 per hour.

3. The cost of materials per Alpha B unit is $4.

4. Manufacturing costs directly applicable to the production of Alpha B are:

Indirect labor $15,000

Utilities 3,000

Depreciation 3,600

Rates and insurance 2,000

All of the above costs will be eliminated if Alpha B is purchased.

1. The lowest price for AlphaB from an outside supplier is $8 per unit. Delivery costs will be $.80 per unit, and a part-time dispatch employee at $17,000 per year will be required.

2. If AlphaB is purchased, the excess space will be used to store SouthPaks finished product. Currently, SouthPak rents storage space at approximately $1.60 per unit stored per year. Approximately 9000 units per year are stored in the rented space.

Required - Should SouthPak make or buy the part? Show all calculations.