Reference no: EM132949367

Athem Corporation produces and sells curling iron. Costs associated with manufacturing 10,000 irons are as follows:

Direct materials $120 x 10,000 =                       1,200,000

Direct manufacturing labor $480 x 10,000 =          4,800,000

Variable manufacturing overhead $240 x 10,000 =   2,400,000

Fixed manufacturing overhead $300 x 10,000 =       3,000,000

Total                                                                11,400,000

The product normally sells for $1600 per unit. The managing director is contemplating outsourcing the production of the curling iron with Artery Limited for $960 per unit. The company also note that one-third of the fixed manufacturing overhead would be avoided if the company choose to outsource. As the management accountant, you are asked to do an analysis and inform the managing director.

Required:

Problem I. Should the company continue to produce the product inhouse or outsource from Artery Limited? Provide an analysis to support your decision.

Problem II. Give two reasons a company may choose to outsource production rather than producing the product inhouse.