Question

Economic Convenience Exercise The Company Beta has the following monthly cost related to one of its departments: Man. Labour 20.000 € Salary of the Department Director 2.000 € Direct Materials 15.000 € Industrial Depreciation 20.000 € Running Costs 9.000 € Manufacturing Overheads 5.000 € The Company is thinking about shutting down the department and let an outside supplier perform the same operation. In that case, the purchasing costs would be equal to 40.000 € Consider the following additional information: a. The workforce cannot be used in other departments and cannot be sacked b. The depreciations are referred for 10.000€ to a machine that can be sold with a complete cost recovery and for 10.000€ for a part of the building which is shared with other departments c. Running costs can be eliminated by 4.000€ d. Manufacturing overheads are indirect and not ceasing Is it worth eliminating the mentioned Department? Answer by adopting the differential reasoning.

Answer 1

Considering the Relevant costs reductions and increases if the department is closed
Amts in Euro
Particulars	Cost Reduction	Cost Increases
Direct Materials reduction	15,000
Industrial Depreciation of Equipment	10,000
Running Cost Reduction	4,000
Increase-Purchase cost from Outside supplier		40,000
Total	29,000	40,000
Therefore, there is a net increase of cost of Euro 11,000 if the department is closed
and same operation is done from outside supplier.
Eliminating the department is not advisable.