Robber Co. manufactures control panels for burglar alarms, a very profitable product. Every product comes with a 1-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, Robber 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 Burgistan 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 2 years.

The current total annual costs of producing the keypads and the display screens are:

1 Material costs for keypads are expected to increase by 5 per cent in 6 months time; material costs for display screens are only expected to increase by 2 per cent 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 per cent of the direct labour cost of 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 Sixty per cent of depreciation and insurance costs relate to an apportionment of the general factory depreciation and insurance costs, the remaining 40 per cent is specific to the manufacture of keypads and display screens.
Required:

(a) Advise Robber Co. whether it should continue to manufacture the keypads and display screens in-house or whether it should outsource their manufacture to Burgistan, assuming it continues to adopt a policy to limit manufacture and sales to 80,000 control panels in the coming year.

(b) Robber 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. Robber Co. wishes to increase its supply to 100,000 control panels (i.e.
100,000 each of keypads and display screens).
Advise Robber Co. as to how many units of keypads and display panels it should either manufacture and/
or outsource in order to minimize its costs.

(c) Discuss the non-financial factors that Robber Co. should consider when making a decision about outsourcing the manufacture of keypads and display screens.

Transcribed Image Text:

Production Keypads 80,000 units Display screens ($000) Direct materials 160 80,000 units ($000) 116 Direct labour 40 60 Heat and power costs Machine costs 220 64 88 26 30 Depreciation and insurance costs 84 96 Total annual production costs 374 390