InSport plc. manufactures and sells sports equipment. From time to time, the company buys in products rather than produce them, if it is better value to do so. One of InSport plc’s customers wants to place an order for 4,600 footballs. The management of InSport plc. are currently deciding on whether to purchase the footballs from another company at a total price of €118,500 or to produce them themselves.

The following information relates to the production of the footballs in-house.

Raw materials required:

Rubber                                                7,500 kgs

Poly-cotton                                         5,000 kgs

Latex                                                   3,000 kgs

Skilled direct labour required               400 hrs

Unskilled direct labour required         160 hrs

 

The following additional information is available:

1. InSport plc. use three types of material in the production of its product and have sufficient stock on hand for the production of the footballs. The following price data is available in respect of each of these raw materials:

 

	Rubber	Poly-Cotton	Latex
	€ per kg	€ per kg	€ per kg
Original purchase price	5.5	6	2.5
Current purchase price	6.25	7	4
Current realisable value	5	6	Nil

 

 

InSport plc. always maintains a stock of Rubber as it is used in many of its production processes. The stock on hand of Poly-cotton was purchased several years ago for another project which was cancelled at short notice. Management does not have any use for Poly-cotton other than in the production of the footballs. If the stock of Latex is not used in the production of the footballs it will have to be disposed of at cost of €0.80 per kg.

1. Skilled direct employees are paid a fixed weekly wage of €600 and are currently under-utilised. It is expected that the hours of skilled labour required to produce the footballs will be resourced out of what is currently classified as ‘idle time’.
2. The unskilled direct labour relates to hours worked by casual employees who are employed as required and paid an hourly rate of €11 per hour 
3. The project will require a production manager to oversee the work. InSport plc. currently employs a manager with the necessary experience to oversee the production line at another of their production sites. This manager currently earns €78,000 per annum. This production manager can be replaced by a temporary manager who will be paid €5,400 per month. Production of the footballs is expected to take two months
4. Variable overhead costs are €14 per skilled direct labour hour.
5. If the company decides to produce the footballs it is estimated that additional fixed production overheads incurred directly in respect of producing the footballs will amount to €9,600.
6. If the equipment need for the production of the footballs is not used for this order, it may be hired out for €600 per month.
7. The depreciation charge for the machinery is expected to be €2,000 per month.
8. Pre-production design costs of €4,300 have already been incurred by InSport plc.
9. InSport adds 15% on to the production cost of any order as an allowance against its fixed administrative costs.

 

A. What is the relevant cost of rubber if InSport produces the footballs? (3 marks)

B. What is the relevant cost of poly-cotton if InSport produces the footballs?  (3 marks) 

C. What is the relevant cost of latex if InSport produces the footballs?   (3 marks)

D.What is the relevant cost of skilled direct labour if InSport produces the footballs?   (2 mark)

E. What is the relevant cost of unskilled direct labour if InSport produces the footballs?   (2 marks)

F. What is the relevant cost of the supervisor if InSport produces the footballs?   (2 marks)

G. What is the relevant cost of variable overheads if InSport produces the footballs?   (2 marks)

H. What is the relevant cost of fixed overheads if InSport produces the footballs?   (2 marks)

I. What is the relevant cost of equipment rental if InSport produces the footballs?   (2 marks)

J. What is the relevant cost of depreciation if InSport produces the footballs?   (1 mark) 

K. What are the relevant design costs if InSport produces the footballs?   (1 mark)

L. What are the relevant admin costs if InSport produces the footballs?   (1 mark)

M. What are the total relevant costs if InSport produces the footballs?   (3 marks)

N. What is the difference between the relevant in-house cost of producing the order and cost of outsourcing the order. (3 marks)