Question

Outsourcing (Make-or-Buy) DecisionAssume a division of Hewlett-Packard currently makes 8,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $33 per board, consisting of variable costs per unit of $26 and fixed costs per unit of $7. Further assume Sanmina-SCI offers to sell Hewlett-Packard the 8,000 circuit boards for $33 each. If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard's suppliers for $29,000 per year. In addition, $3 per unit of the fixed overhead applied to the circuit boards would be totally eliminated.Calculate the net benefit (cost) to HP of outsourcing the component from Samina-SCI. Use a negative sign with your answer, if appropriate.

Answer 1

Answer:

(-$3,000)

Explanation:

Cost of manufacture:

= Variable cost + Fixed cost

= (8,000 units × $26 per unit) + (8,000 units × $7 per unit)

= $208,000 + $56,000

= $264,000

Net benefit (cost):

= Cost of manufacture - Outsourcing cost

= Cost of manufacture - (Purchase price + Fixed overhead applied - Rental income)

= $264,000 - [$264,000 + (8,000 units × $4) - $29,000

= $264,000 - $267,000

= (-$3,000)

Therefore, HP should manufacture circuit boards as the cost of outsourcing is more than manufacture.