Question
Outsource computations, qualitative factors. Diamond Light Company incurred the following costs to produce 50,000 light switches for the floor lamps in 2016. Direct materials $100,000
Outsource computations, qualitative factors.
Diamond Light Company incurred the following costs to produce 50,000 light switches for the floor lamps in 2016.
Direct materials $100,000
Direct Labor 150,000
Variable manufacturing overhead 80,000
Fixed manufacturing overhead 120,000
Total manufacturing costs $450,000
The ignition Company has offered to supply the switches for $16 per unit. An analysis of the overhead costs has identified that if the switches are outsourced, Diamond Light Company would eliminate $20,000 of fixed costs, and could use the released production capacity to generate additional income of $56,000 from producing a different product.
Required:
A. From a financial perspective, should the light switches be outsourced? Show calculations.
B. What qualitative factors need to be considered in the outsourcing decision?
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