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?