Question

The company has a factory producing pain-killer pills. The company factory is suffering a lost recently because of the high cost of production. The current profit margin is at 5%. The company estimated the cost of productions are as follows on the current level of revenue at $80,000,000.

              -Raw material costs                                     -$64,000,000

              -Direct factory overheads                          -$605,000

              -Allocated overheads costs                        -$24,050,000

                                           TOTAL                               -$95,000,000

A contractor has approached the company to supply all the $80,000,000 sales value of the products at 15% discount.

Required

Evaluate the offer to outsource the whole production of the pain-killer products under a production contract management.

What are the qualitative considerations that should be taken into account in this decision

Answer 1

1)Since allocated cost will be incurred whether offer is accepted or not ,it is irrelevant in deciding about offer.

Incremental revenu [80,000,000(1-.15)	68,000,000
less:Raw material costs	(64,000,000)
Direct factory overheads	(605,000)
Incremental benefit /(cost)	3395000

since the offer results in incremental benefit of 3395000 ,offer should be accepted.

2)qualitative considerations that should be taken into account in this decision :

a)loss of market share

b)repeat of offer

c)employees morale ,compretitive factors etc