A business places substantial emphasis on customer satisfaction and, to this end, delivers its

product in special protective containers. These containers have been made in a department

within the business. Management has recently become concerned that this internal supply of

containers is very expensive. As a result, outside suppliers have been invited to submit tenders

for the provision of these containers. A quote of 250,000 a year has been received for a

volume that compares with current internal supply.

An investigation into the internal costs of container manufacture has been undertaken and

the following emerges:

(a) The annual cost of material is 120,000, according to the stores records maintained, at

actual historic cost. Three-quarters (by cost) of this represents material that is regularly

stocked and replenished. The remaining 25 per cent of the material cost is a special foam

ing chemical that is not used for any other purpose. There are 40 tonnes of this chemical

currently held. It was bought in bulk for 750 a tonne. Today's replacement price for this

material is 1,050 a tonne but it is unlikely that the business could realise more than 600

a tonne if it had to be disposed of owing to the high handling costs and special transport

facilities required.

(b) The annual labour cost is 80,000 for this department, however, most are casual employees

or recent starters, and so, if an outside quote was accepted, little redundancy would be

payable. There are, however, two long-serving employees who would each accept as a

salary 15,000 a year until they reached retirement age in two years' time.

(c) The department manager has a salary of 30,000 a year. The closure of this department

would release him to take over another department for which a vacancy is about to be

advertised. The salary, status and prospects are similar.

(d) A rental charge of 9,750 a year, based on flfloor area, is allocated to the containers depart

ment. If the department was closed, the flfloor space released would be used for warehousing

and, as a result, the business would give up the tenancy of an existing warehouse for which

it is paying 15,750 a year.

(e) The plant cost 162,000 when it was bought fifive years ago. Its market value now is 28,000

and it could continue for another two years, at which time its market value would have fallen

to zero. (The plant depreciates evenly over time.)

(f ) Annual plant maintenance costs are 9,900 and allocated general administrative costs

33,750 for the coming year.

Required:

Calculate the annual cost of manufacturing containers for comparison with the quote using

relevant fifigures for establishing the cost or benefifit of accepting the quote. Indicate any assump

tions or qualififications you wish to make.