HI

I am working on a make or buy decision management accounting question. My questions are:

• should fixed manufacturing overhead be included in costing of a unit when determine if we should outsource or maintain inhouse part of the production process?
• we are told that if we outsource, we can sell equipment, so the saving would be the price of the sold equipment, but what about depreciation?

Option 1: outsource to ProFinish

Price per unit $30.00

shipping costs $7.50

$37.50

Quality inspection $1.50have right to reject units not meeting specs

Total cost per unit $39.00

units per year137,500

contract cost per year $5,362,500 ($39.00 x 137,500 units)

Option 2: Maintain finishing inhouse

Costs per unit:

Direct material $14.00

Direct labour $12.50

Variable MOH $6.00

Fixed MOH $5.00 incl bldg amort, insur, property tax -should this be included in determining cost per unit?

Quality inspection $1.50

$39.00

Plant supervisor wage per unit $0.55 $75,000 / 137,500 units

Production Manager wage per unit $0.15 (20% x $100,000 salary)/137,500 units

Total cost per unit $39.69 ($39 + 0.55 + 0.15)

units per year137,500

production cost per year $5,457,500

savings from sale of equipment $50,000

total cost to produce inhouse per year = $5,407,500

If they can sell equipment:

cost Equipment $860,000

Amortization straighline 8 years

Amortization per year $107,500

if outsource can sell machine for $50,000

I don't understand what to do with the equipment? I get that $50,000 would be "saved" from its sale, but what happens to the depreciation?

Thanks,

Melanie