Question

Jennifer Grant, a management accountant with the Giant Corporation, is evaluating whether a component, X-200, should continue to be manufactured by Giant or purchased from Medium Company, an outside supplier. Medium has submitted a bid to manufacture and supply the 32,000 units of X-200 that Giant will need for 2019 at a price of $17.30, to be delivered according to Giant’s production specifications and needs. While the contract price of $17.30 is only applicable in 2019, Medium is interested in entering into a long-term arrangement beyond 2019.

From plant records and interviews with John Porter, the plant manager, Grant gathered the following information regarding Giant’s costs to manufacture 30,000 of X-200 in 2018:

	Costs for 30,000 units in 2018
Direct materials	$195,000
Direct manufacturing labour	120,000
Plant space rental	84,000
Equipment leasing	36,000
Other manufacturing overhead	225,000
Total manufacturing costs	$660,000

• 40% of the other manufacturing overhead is variable, proportionate to the direct manufacturing labour costs. The fixed component of other manufacturing overhead is expected to remain the same whether X-200 is manufactured by Giant or outsourced to Medium.
• Giant’s just-in-time policy means inventory is negligible.

Grant is aware that cost studies can be threatening to current employees because the findings may lead to reorganizations and layoffs. She knows that Porter is concerned that outsourcing X-200 will result in some of his close friends being laid off. Therefore, she performs her own independent analysis of competitive and other economic data, which reveals that

• Prices of direct materials are likely to increase by 8% in 2019 compared to 2018.
• Direct manufacturing labour rates are likely to be higher by 5% in 2019 compared to 2018.
• The plant rental contract can, in fact be terminated by paying $10,000. Giant will not have any need for this space if X-200 is outsourced.
• The equipment lease can be terminated by paying $3,000.

Grant shows Porter her analysis. Porter argues that Grant is ignoring the amazing continuous improvement that is occurring at the plant and that the increases in direct material prices and direct manufacturing labour rates assumed by Grant will not occur. But Grant is very confident about the accuracy of the information she has collected.

Required

1. Based on the information provided by Porter, should Giant make X-200 or buy it? Show all calculations.
2. Based on the information that Grant obtained, should Giant make X-200 or buy it? Show all calculations.

3. What other factors should Giant consider before making a decision

Answer 1