1. b) How much will the Dairy Division of BMC save or lose by manufacturing the rennet in 2023?

   (Outsourcing and make-or-buy decisions, Chapter 10, 10 marks)

Question 3 ii. When planning the next year, the manager of the Dairy Division of BMC is considering whether to manufacture rennet, an enzyme used to coagulate milk which is an ingredient for the cheese production line, or outsource this ingredient with Dangke Enterprises, located in South Sulawesi, Indonesia. If the Dairy Division buys the rennet from Dangke Enterprises, it can use the facilities previously used to manufacture rennet to manufacture enzymes for another division of BMC. The manager of the division is considering three options for 2023: i. Manufacture the rennet for the Dairy Division of BMC in Colac and do not manufacture enzymes for another division of BMC. Outsource the manufacture of rennet with Dangke Enterprises and do not manufacture enzymes for another division of BMC. Outsource the manufacture of rennet with Dangke Enterprises and use the facilities in Colac to manufacture enzymes for another division of BMC. The Dairy Division of BMC has the following costs for 250,000 bottles of rennet in 2022: Table 4 - Product costs Product Costs Direct materials $ 50,000 Direct labour $ 30,000 Mixed overhead $ 25,000 Variable overhead $ 15,000 Fixed overhead $ 30,000 Total product cost $ 150,000 The mixed overhead of $25,000 consists of material handling and set-up costs; total material handling and set- up costs equal fixed costs of $5,000 plus variable costs of $200 per batch. In 2022, the Dairy Division produced 250,000 bottles of rennet in 100 batches of 2,500 units each. When planning for 2023, the manager of the Dairy Division of BMC has the following estimates: Dangke Enterprises offers to sell the rennet to the Dairy Division for $0.50 per bottle. Page 6 of 10 If the Dairy Division does not outsource the manufacture of rennet, it will produce 250,000 bottles of rennet, in 200 batches of 1,250 bottles each. The fixed and variable costs are expected to remain the same, except for the mixed overhead. Regarding the mixed overhead, the variable costs per batch are expected to decrease from $200 to $100. If BMC outsources the manufacture of rennet with Dangke Enterprises and uses the facilities in Colac to manufacture enzymes for another division, the expected additional future operating profit of manufacturing enzymes for another division of BMC is $30,000 per year