McKinson Publishers produces the book covers for its hardbound books. Recently, Marliss Book Binders purchased new robotic equipment that cutsm trims and prints book covers in one process. Marliss offered to provide book covers for McKinson at $1.45 per book. Daniel Nguyen, the management accountant for McKinson Publishers, analyses the cost information for internally producing hardbound book covers as follows:

Total costs for

200,000 book covers

Cost per unit

Direct materials

$100,000

$0.50

Direct labour

$80,000

$0.40

Manufacturing overhead

$100,000

$0.50

Supervisor's salary

$90,000

$0.45

Total cost

$370,000

$1.85

After summarising the costs for producing the book covers in-house, Daniel needs to identify costs that are relevant and irrelevant to the decision. First, he collects more information. He learns from the production manager that the supervisor could be laid off if the book covers are outsourced. As a management accountant, Daniel already knows that manufacturing overhead is an indirect cost. In this case, it is allocated to books based on the number of direct labour hours used in each production process. Overhead costs will be incurred even if the book covers are outsourced. However, after examining past utility bills, Daniel estimates that closing off the part of the plant where book covers are produced would save about $30,000, or $0.15 per book cover.

Required:

a) Identify and explain which costs are relevant and irrelevant to this make-or-buy decision of McKinson. (4 marks)

b) Use the relevant production and outsourcing costs identified in part (a) to analyse a possible cost saving of this make-or-buy decision by contrasting the internal production cost with external purchase cost, and make a suggestion. (Hint: irrelevant cost(s) should be excluded.) (4 marks)

c) Suggest and discuss qualitative factors that are relevant to this make-or-buy decision of McKinson Publishers. (4 marks)