Tempor Corp. estimates it will produce 30,000 units of a part that goes into its final product. It currently produces this part internally, but is considering outsourcing this activity. Current internal capacity permits for a maximum of 60,000 units of the part. The production manager has prepared the following information concerning the internal manufacture of 60,000 units of the part:
Per Unit
Direct materials $ 3.00
Direct labour 4.00
Variable overhead 5.00
Fixed overhead 6.00
Total cost $18.00
The fixed overhead of $6 per unit includes a $1.50 per unit allocation for salary paid to a supervisor to oversee production of the part. The fixed costs would not be reduced by outsourcing, except that the supervisor would be terminated. Assume that if Tempor outsources, its purchase price from the outsourcer is $12 per unit.
1. Should Tempor outsource?
2. Assume Tempor has received a special order for 10,000 units of the part from Adigen Co. Adigen will pay Tempor $23 per part, but will take the parts only if they have been manufactured by Tempor. Thus, Adigen will engage in the special order only if Tempor does not outsource any of its production. Should Tempor accept the special order?
