Answer the questions below regarding a decision on whether to outsource the production of units where Company A does have full capacity utilization currently. Its current budget sales are $300,000,000 and operating profit is $75,000,000. The potential outsource supplier, Company B, has capacity to produce 250,000 units annually for Company A. Company A's Board thinks it will be less costly to outsource. The Board believes the internal cost is $300 per unit while Company B's cost is $280 all-in. So, outsourcing has to be less costly to Company A per the Board.

Question B Make or buy analysis (15 marks! Answer the questions below regarding a decision on whether to outsource the production of units where Company A does have full capacity utilization currently. Its current budget sales are $300,000,000 and operating prot is $75,000,000. The potential outsource supplier, Company B, has capacity to produce 250,000 units annually for Company A. Company A's Board thinks it will be less costly to outsource. The Board believes the internal cost is $300 per unit while Company B's cost is $280 all-in. So, outsourcing has to be less costly to Company A per the Board. Production Capacity Units 1,000,000 Excess Capacity Units 25.00% 250,000 Unit Price Revenue Selling Price - full capacity 400 387,500,000 Selling Price - excess capacity 350 87,500,000 Unit Costs Excess Capacity Full Capaciy Direct Materials 100 25,000,000 100,000,000 Direct Labour 80 20,000,000 80,000,000 Variable Factory Overhead 50 12,500,000 50,000,000 Depreciation 30 7,500,000 30,000,000 Service allocations 40 10,000,000 40,000,000 300 75,000,000 300,000,000 Operting Profit - Accounting 12,500,000 87,500,000 Outside cost for the units 280 if the work is outsourced Questions 1. Calculate the additional operating prot accounting from outsourcing (i.e., stand-alone) 250,000 production units. 2. Calculate the return on sales currently return on total sales if 250,000 units of production is outsourced. 3. Calculate the return on total sales if all excess production capacity is done internally. 4. Calculate the incremental per unit cost of outsourcing production compared to the internal per unit cost. 5. Justify whether you would make internally or outsource-buy production