supply of containers is very expensive. As a result, outside suppliers have been invited to

submit tenders for the provision of these containers. A quote of $250,000$ a year has been

received for a volume that compares with current internal supply.

An investigation into the internal costs of container manufacture has been undertaken

and the following emerges:

$($a$)$ The annual cost of material is $120,000,$ according to the stores records, maintained at

actual historic cost. Three$-$quarters $($by cost$)$ of this represents material that is regularly

stocked and replenished. The remaining $25$ per cent of the material cost is a special

foaming chemical. This chemical is not used by the business for any purpose other than

making the containers. There are $40$ tonnes of this chemical currently held. It was bought

in bulk for $750$ a tonne. Today's replacement price for this material is $1,050$ a tonne,

but it is unlikely that the business could realise more than $600$ a tonne if it had to be

disposed of owing to the high handling costs and special transport facilities required.

$($b$)$ The annual labour cost is $80,000$ for this department. Most of this cost, however,

relates to casual employees or recent starters. If an outside quote were accepted, there$-$

fore, little redundancy would be payable. There are, however, two part$-$time employees

who would each accept as a salary $15,000$ a year until they reached retirement age in

two years' time.

$($c$)$ The department manager has a salary of $30,000$ a year. The closure of this department

would release him to take over another department for which a vacancy is about to be

advertised. The salary, status and prospects are similar.

$($d$)$ A rental charge of $9,750$ a year, based on floor area, is allocated to the containers

department. If the department were closed, the floor space released would be used for

warehousing and, as a result, the business would give up the tenancy of an existing

warehouse for which it is paying $15,750$ a year.

$($e$)$ The plant cost $162,000$ when it was bought five years ago. Its market value now is

$28,000$ and it could continue for another two years, at which time its market value

would have fallen to zero. $($The plant depreciates evenly over time.$)$

$($f$)$ Annual plant maintenance costs are $9,900$ and allocated general administrative costs

$33,750$ for the coming year.

Required:

Calculate the annual cost of manufacturing containers for comparison with the quote using

relevant figures for establishing the cost or benefit of accepting the quote. Indicate any

assumptions or qualifications you wish to make.