Sherman Manufacturing Company Currently Manufactures a Component Used in One

Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 10,000 components are as follows: $$\begin{array} { | l | c | } \hline \text { Material cost } & \$ 5 \text { per unit } \\\hline \text { Labor cost } & \$ 4 \text { per unit } \\\hline \text { Overhead } & \$ 1 \text { per unit } \\\hline \text { Batch-level set-up costs for the year } & \$ 5,000 \\\hline \text { Product-level manager's salary } & \$ 18,000 \\\hline \text { Allocated facility-level costs } & \$ 12,000 \\\hline\end{array}$$
An outside company has offered to supply 10,000 units of the component for $12.50 each. If the company outsources the component, it will be able to rent out the idled factory space for $1,000 per month but will not terminate the product manager.
Required:
1) Which items are not relevant to this outsourcing decision?
2) Identify any opportunity costs associated with this decision.
3) Prepare a quantitative analysis that indicates whether the component should be outsourced.

Correct Answer:

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1) Non-relevant items: product-level cos...

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