Question

Zoe Manufacturing Practice Set

Management is considering a proposal to outsource the Component Assembly Division that is currently
headed by Bonnie. If this occurs, the $250,000 of monthly factory depreciation will continue, but all other
factory overhead costs will be avoided. Selling, general, and administrative costs will not change.
A foreign company with lower direct labor costs is offering to provide component assembly activities, including
all necessary raw material, at 50% of Zoe’s resale price. The only other cost that would be incurred by Zoe
would be a fixed amount of $400,000 per month for bulk freight charges.
You are to evaluate the financial merits of the outsourcing proposal.

Requirements:
27. Is the $250,000 of factory depreciation relevant to your evaluation? Why or why not?

28. Revisit the reporting department’s gross profit calculations for January through March, and determine
if the gross profit would have been higher or lower if outsourcing had been used.

29. Analyze the data, and determine if your answer might change if there was a significant increase
in sales volume. You may assume there is ample factory capacity, and that the behavior of cost of
goods sold (fixed versus variable portions) would not be materially altered with revenue growth.

Answer 1

Solution:-

Zoe Manufacturing Practice Set

The executives is thinking about a proposition to redistribute the Component Assembly Division that is as of now

headed by Bonnie. On the off chance that this happens, the $250,000 of month to month plant devaluation will proceed, however all other

manufacturing plant overhead costs will be evaded. Selling, general, and authoritative costs won't change.

A remote organization with lower direct work costs is putting forth to give segment get together exercises, including

all fundamental crude material, at half of Zoe's resale cost. The main other cost that would be caused by Zoe

would be a fixed measure of $400,000 every month for mass cargo charges.

You are to assess the money related benefits of the redistributing proposition.

Necessities:

27. Is the $250,000 of industrial facility deterioration important to your assessment? Why or why not?

28. Return to the detailing division's gross benefit computations for January through March, and decide

on the off chance that the gross benefit would have been higher or lower if re-appropriating had been utilized.

29. Examine the information, and decide whether your answer may change if there was a critical increment

in deals volume. You may expect there is adequate processing plant limit, and that the conduct of expense of

products sold (fixed versus variable parts) would not be substantially changed with income development.