CFO has done some initial research and has found a manufacturer out of Vietnam that can provide these rakes for $39,000/each.

She is worried about a specific piece of machinery that is used in the rakes department that cost $3,500,000 to buy and would have no other uses, the CFO believes it could be sold for $120,000.

Carved-out income statement from the rake's division.

Per 100 units sold

Sales $ 4,500,000

Direct Materials 2,200,000

Direct Labour 1,000,000

Fixed expenses

Salaries 400,000

Sales staff commissions 275,000

Rent 200,000

Amortization - specialized equipment 175,000 (cost is mentioned above)

Training 115,000

Data processing 105,000

Insurance 75,000

Total Fixed Expenses 1,345,000

Net operating income (45,000)

From your research you have determined the following:

The salaries are made up of 25% salaried management level employees & the rest are hourly wages from production staff. This department employees about 15 employees some of which are part-time

Commissions are paid strictly on the sales of rakes

Rent & data processing are allocated by head office

Training is to instruct new staff on the specialized piece of equipment

Insurance is 75% the rakes division share of Midwest's general liability policy, the other 25% is specifically held for the specialized equipment, that can be cancelled with no penalty

REQUIRED:

• A memo to the CFO that discusses her mentioned concerns regarding the avoidable and non-avoidable costs and why selling a product line with a negative operating income does not always make sense.Also discuss sunk costs & the specialized piece of equipment. In addition, provide some qualitative factors that need to be considered when deciding whether to outsource