Cleaning Equipment Specialists Ltd (CES) manufacture cleaning equipment for household and industrial use. They have received a bid from a supplier to provide motors for their household vacuum cleaner product line. The bid is to supply 10,000 motors at a price of $85 each. CES currently manufacture the motors in-house.

The management accountant of CES has estimated the current costs of producing one motor as follows:

Direct Materials $42

Direct Labour 18

Variable Overhead 20

Fixed Overhead 66

$146

(a) Based on the above information should CES produce the motor in-house or purchase from the supplier? (3 marks)

The CEO of CES has asked the management accountant to investigate whether any decreases in costs would be possible if they purchase the motor from the supplier. The accountant has determined that the company would be able to save costs on setups as two less setups would be required in the manufacture of the vacuum cleaners. Total spending would be reduced by $16,650 per setup. The material handling division would be able to reduce staff costs by laying off one staff member at a saving of $33,300 and one quality control inspector would also be able to be laid off saving CES $46,600. It is also determined that Engineering work would be reduced by 400 hours at $15 per hour. However, even though the work decreases by 400 hours the engineer assigned to making the motors also spends time on other products.

(b) Given the additional information from the management accountants investigation is your answer the same as in (a) above? Repeat your analysis showing all workings and state any assumptions you have made. (7 marks)

(c) Identify and discuss any other factors (i.e. qualitative factors) or strategic implications that may affect CESs decision on whether to outsource the production of the vacuum cleaner motors. (4 marks)