Question

A while later Manny comes into your office with another proposal that came past his desk. As part of GT's mining operations, GT produces its own mine excavator tracks. A Japanese consortium, KoBI Engineering, has approached GT to produce the excavator tracks for GT. You pull out your general ledger report, and you review the expenses for tracks last year. GT will typically produce its 90 excavator tracks, with a cost to the end of last year as follows: Direct Materials: $175,000 Labour for employees working directly on the tracks: $300,000 Overhead for Factory workshop: Annual Rent: $100,000 Annual Depreciation on factory machinery: $12,000 Factory Machine parts: $50,000 Factory Utilities: $30,000 Kobi has offered to sell GT the excavator tracks at $6,100/ unit. The workshop is used for a number of functions outside of the manufacturing of tracks.

question 1. Undertake an analysis of the above costs and advise Manny on which option should be taken from a purely financial perspective ?

Answer 1

Solution: