Samantha is evaluated on the reported profits of her product line. She is considering whether and which of two products to outsource. Relevant data are as follows:
Item........................................... Product A.................. Product B
Cost to buy (outsource)........................ $60,000..................... $45,000
Cost to make internally:
Materials ........................................$20,000..................... $40,000
Labor costs .....................................$30,000..................... $10,000
Samantha's firm allocates overhead costs at 150% of labor costs. Because her products account for less than 2% of the firm's total sales, Samantha believes that total firm-wide overhead costs would be unaltered because of her decision about whether and which products to outsource.
Required:
a. From the firm's perspective, which, if any, of the two products should be outsourced? To make this decision, calculate the change in the firm's profit.
b. Which of the two products, if any, would Samantha desire to outsource? To make this decision, calculate the change in the reported profit of Samantha's products.
c. Comment on the assertion that "allocations make fixed costs appear to be variable costs."