Robert Co manufactures control panels for burglar alarms, a very profitable product. Every product comes with a one-year warranty offering free repairs if any faults arise in this period. It currently produces and sells 80,000 units per annum, with production of them being restricted by the short supply of labour. Each control panel includes two main components - one keypad and one display screen. At present, Robert manufactures both of these components in-house. However, the company is currently considering outsourcing the production of keypads and/or display screens. A newly established company based in Germany is keen to secure a place in the market, and has offered to supply the keypads for the equivalent of $8.60 per unit. This price has been guaranteed for two years. The current total annual costs of producing the keypads and the display screens are: Keypads Display screen Production 80,000 units 80,000 units $'000 $'000 3. Heat and power costs include an apportionment of the general factory overhead for heat and power as well as the costs of heat and power directly used for the production of keypads and display screens. The general apportionment included is calculated using 50 per cent of the direct labour cost for each component and would be incurred irrespective of whether the components are manufactured in house or not. 4. Machine costs are semi -variable; the variable elements relates to set up costs, which are based on the number of batches made. The keypads 'machine has fixed costs of $8,000 per annum and the display screens 'machine has fixed costs of $12,000 per annum. While both components are currently made in batches of 500, this would need to change, with immediate effect to batches of 400. 5. 60 per cent of depreciation and insurance costs relate to an apportionment of the general factory depreciation and insurance costs; the remaining 40 per cent is specific to the manufacture of keypads and display screens. Direct materials 320 232 Required: a. Advise Robert Co whether it should continue to manufacture the keypads and display screens in-house or whether it should outsource their manufacture to the supplier in Germany, assuming it continues to adopt a policy to limit manufacture and sales to 80,000 control panels in the coming year. (9 marks) Direct labour 80 120 128 176 52 60 Heat and power costs Machine costs Depreciation and insurance costs Total annual production costs 168 192 748 780 b. Robert takes 0.5 labour hours to produce a keypad and 0.75 labour hours to produce a display screen. Labour hours are restricted to 100,000 hours and labour is paid at $1 per hour. Robert Co wishes to increase its supply to 100,000 control panels (that is, 100,000 each of keypads and display screens). Advise Robert as to how many units of keypads and display panels they should either manufacture and/or outsource in order to minimizetheir costs. (3 marks) Notes: 1. Materials costs for keypads are expected to increase by 5 per cent in six months time; materials costs for display screens are expected to increase by 2 per cent only, but with immediate effect. 2. Direct labour costs are purely var iable and not expected to change over the next year. c. Discuss the non-financial factors that Khalifa should consider when making a decision about outsourcing the manufacture of keypads and display screens. (3 marks) Robert Co manufactures control panels for burglar alarms, a very profitable product. Every product comes with a one-year warranty offering free repairs if any faults arise in this period. It currently produces and sells 80,000 units per annum, with production of them being restricted by the short supply of labour. Each control panel includes two main components - one keypad and one display screen. At present, Robert manufactures both of these components in-house. However, the company is currently considering outsourcing the production of keypads and/or display screens. A newly established company based in Germany is keen to secure a place in the market, and has offered to supply the keypads for the equivalent of $8.60 per unit. This price has been guaranteed for two years. The current total annual costs of producing the keypads and the display screens are: Keypads Display screen Production 80,000 units 80,000 units $'000 $'000 3. Heat and power costs include an apportionment of the general factory overhead for heat and power as well as the costs of heat and power directly used for the production of keypads and display screens. The general apportionment included is calculated using 50 per cent of the direct labour cost for each component and would be incurred irrespective of whether the components are manufactured in house or not. 4. Machine costs are semi -variable; the variable elements relates to set up costs, which are based on the number of batches made. The keypads 'machine has fixed costs of $8,000 per annum and the display screens 'machine has fixed costs of $12,000 per annum. While both components are currently made in batches of 500, this would need to change, with immediate effect to batches of 400. 5. 60 per cent of depreciation and insurance costs relate to an apportionment of the general factory depreciation and insurance costs; the remaining 40 per cent is specific to the manufacture of keypads and display screens. Required: Direct materials 320 232 Direct labour 80 120 128 176 52 60 Heat and power costs Machine costs Depreciation and insurance costs Total annual production costs 168 192 748 780 Notes: 1. Materials costs for keypads are expected to increase by 5 per cent in six months time; materials costs for display screens are expected to increase by 2 per cent only, but with immediate effect. 2. Direct labour costs are purely var iable and not expected to change over the next year. c. Discuss the non-financial factors that Khalifa should consider when making a decision about outsourcing the manufacture of keypads and display screens