|t Went Data Way is trying to determine whether to produce a component for its computers internally or outsource production of the component to an external supplier. |t Went Data Way is currently undertaking all manufacturing internally. The estimated cost to manufacture 20,000 units of this component are as follows: Raw Material X (20,000 kilograms required) - $720,000 Raw Material Y (10,000 kilograms required) - $300,000 Direct labour - $416,000 Variable manufacturing overhead - $150,000 Division manager's annual salary - $77,000 Allocated other manufacturing overhead - $267,000 It Went Data Way needs 20,000 units of the component per year. It Went Data Way has consulted external suppliers and they are offering a price of $55 per unit of the component. Other Relevant Information 60,000 kilograms of Raw Material X currently sit in raw materials inventory. It Went Data Way paid $720,000 for this raw materials inventory, last year. To purchase more Raw Material X, It Went Data Way would have to pay $12 per kilogram. There is no expiry date on Raw Material X. The Company currently has no Raw Material Y in raw materials inventory. To purchase more Raw Material Y, It Went Data Way would have to pay $30 per kilogram. There is no expiry date on Raw Material Y. The company does not anticipate any changes to direct labour or variable overhead in the next three years. If the component is purchased, the internal division that does all the manufacturing for the component will need to be shut down. The manager of this department will be transferred to head ofce. Head ofce is currently searching for someone with a similar skill set as the manager. Equipment in the internal manufacturing division was purchased for $800,000. The equipment has an 8 year useful life and there are still 3 years of useful life remaining. The equipment has no salvage value. If the internal manufacturing division is closed, the equipment would have no other use. The equipment can be sold for $500,000. If a new piece of equipment needs to be purchased, it would cost $1,900,000. The accounting department arbitrarily allocates other manufacturing overhead costs to this product based on the CFO's bestjudgment. The CFO does not feel that it would be fair to allocate other manufacturing overhead to other products if the component is purchased from the outside supplier, so the accounting department will continue to arbitrarily allocate $200,000 to the cost of the purchased components even if the component is purchased from an outside supplier. The other manufacturing costs relate to a VP Production that tours the sites to check on workers. Using the grid below, calculate the relevant cashows if the Company decides to manufacture the component internally, rather than purchase it from an external supplier. All numbers should be the total inow or outflow over a total of three years. Enter 0 if something should be not be included. Do not use + and - signs. Show negative cash ows by putting an O in the right column, positive cash flows by putting an I in the right column, and NA if there is no effect. Do not use $ signs in your nal answers. Round your nal answers to the nearest dollar. Relevant costs if you manufacture internally Total for Three Years (Do not use + or - signs or indicate | I O / NA (Enter the letter only whether a positive or negative Purchase cost of component ___ Variable Manufacturing $ Overhead Allocated Other Manufacturing $ Overhead ___ Based on your quantitative analysis alone, should It Went Data Way manufacture the component internally, Yes or No
