12. BURGLAR CO
Burglar Co manufactures control panels for burglar alarms, a very profitable product. Every product comes with a one-year warranty offering free repairs if any faults arise in this period.
It currently produces and sells 80,000 units per annum, with production of them being restricted by the short supply of labour. Each control panel includes two main components – one keypad and one display screen. At present, Burglar Co manufactures both of these components in-house. However, the company is currently considering outsourcing the production of keypads and/or display screens. A newly established company based in Houston is keen to secure a place in the market, and has offered to supply the keypads for the equivalent of $4.10 per unit and the display screens for the equivalent of $4.30 per unit. This price has been guaranteed for two years.
The current total annual costs of producing the keypads and the display screens are:
Keypads Display screens
Production 80,000 units 80,000 units
Direct materials 160 116
Direct labour 40 60
Heat and power costs 64 88
Machine costs 26 30
Depreciation and insurance costs 84 96
Total annual production costs 374 390
1. Materials costs for keypads are expected to increase by 5% in six months' time; materials costs for display screens are only expected to increase by 2%, but with immediate effect.
2. Direct labour costs are purely variable and not expected to change over the next year.
3. Heat and power costs include an apportionment of the general factory overhead for heat and power as well as the costs of heat and power directly used for the production of keypads and display screens. The general apportionment included is calculated using 50% of the direct labour cost for each component and would be incurred irrespective of whether the components are manufactured in-house or not.
4. Machine costs are semi-variable; the variable element relates to set-up costs, which are based upon the number of batches made. The keypads' machine has fixed costs of $4,000 per annum and the display screens' machine has fixed costs of $6,000 per annum. Whilst both components are currently made in batches of 500, this would need to change, with immediate effect, to batches of 400.
5. 60% of depreciation and insurance costs relate to an apportionment of the general factory depreciation and insurance costs; the remaining 40% is specific to the manufacture of keypads and display screens.
A. Advise Burglar Co whether it should continue to manufacture the keypads and display screens in-house or whether it should outsource their manufacture to the supplier in Houston, assuming it continues to adopt a policy to limit manufacture and sales to 80,000 control panels in the coming year.
B. Burglar Co takes 0.5 labour hours to produce a keypad and 0.75 labour hours to produce a display screen. Labour hours are restricted to 100,000 hours and labour is paid at $1 per hour. Burglar Co wishes to increase its supply to 100,000 control panels (i.e., 100,000 each of keypads and display screens).
Advise Burglar Co as to how many units of keypads and display panels they should either manufacture and/or outsource in order to minimise their costs.
C. Discuss the non-financial factors that Burglar Co should consider when making a decision about outsourcing the manufacture of keypads and display screens.