Download
1 / 8
80 likes | 83 Views
Chapter 21. Outsourcing Decisions. Prepared by Diane Tanner University of North Florida. The Outsourcing/ Insourcing Decision. 2. Used to assess whether a product or service should be generated internally or purchased from an outside supplier Also called Make or Buy decisions
E N D
Chapter 21 Outsourcing Decisions Prepared by Diane Tanner University of North Florida
The Outsourcing/Insourcing Decision 2 • Used to assess whether a product or service should be generated internally or purchased from an outside supplier • Also calledMake or Buydecisions • Only incremental costs and cost savings are considered since there are no incremental revenues • Opportunity costs are relevant
Factors Affecting Outsourcing Decisions 3 • Risk versus control • Quality control • Payment to salaried employees • Impact on employee morale of the remaining work force • Timeliness of obtaining the service or product being outsourced
Relevant Costs in Outsourcing Decisions • Variable costs of production • Avoidable fixed costs • Fixed costs that won’t be incurred if the 'buy' decision is made • Cost savings • Various manufacturing costs including • Direct labor • Direct materials • Variable manufacturing overhead • Some fixed manufacturing overhead costs • Opportunity costs
Outsourcing Example 5 DP manufactures part 22 currently used in one of its products. The equipment used to manufacture part 22 has no resale value. The supervisor will be terminated. The total amount of general overhead, which is allocated equally to each produced product, will be unaffected if outsourced. An outside supplier has offered to provide the 1,000 parts at a cost of $25 per part. The following costs are incurred to produce 1,000 units of part 22: Should DP buy from the supplier?
Example Continued 6 Not relevant Is an allocated cost; total stays the same regardless of decision Step 1: Determine what the decision is. Should DP outsource? Step 2: Determine what is relevant. Relevant Will not be incurred if products are not produced Not relevant A sunk cost with no resale value
Incremental Approach Solution 7 Should DP outsource part 22? Based solely on quantitative analysis, no. It will cause profit to drop by $8,000 if outsourced. Note that only relevant costs are listed with the incremental approach.
