Question
Company XYZ is considering outsourcing their Product A. Facts: 1) Product A makes up 30% of a companies sales revenue and production volume 2) By
Company XYZ is considering outsourcing their Product A.
Facts:
1) Product A makes up 30% of a companies sales revenue and production volume 2) By reducing sales price 5%, can increase unit sales volume by 15% 3) Product A sales were $27 million last year 4) Direct material costs for Product A were $14.3 million and overhead costs were $4.2 million 5) If product is outsourced, only $2.9 million overhead will be avoided 6) Direct selling costs are 8% commission to sales reps, and $2 million advertising 7) Layoffs due to outsourcing will include 3 admin managers (saving $135,000), 8 admin support staff (saving $256,000), 10 supervisors (saving $500,000), and 128 production personnel (saving $4,736,000). 8) XYZ will incur one-time charge of $1 million for severance pay for dismissed employees 9) XYZ will need to spend $200,000 for construction of receiving facilities for outsourced product
CURRENT:
Sales (all products) 90.2 Sales (Product A) 27
COGS 74.3 COGS 18.5
Gross Margin 15.9 Gross Margin 8.5
Admin Costs 1.6
Selling Costs 11.2
Net Income 3.1 IF PRODUCT A OUTSOURCED: Material costs 14.6 Labor 2.1 Overhead 2.7 Other 1.5 Total 20.9
Transportation 0.6 Markup 10% 2.1 Total Cost for Product A 23.6
IF Company XYZ chooses to outsource Product A, what would be the expected Net Income for the company? What would be the Gross profit margin for Product A?
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