LO.3 (Outsourcing) Louisiana Luggage Components manufactures handles for suitcases
and other luggage. Attaching each handle to the luggage requires, depending on
the size of the luggage piece, between two and six standard fasteners, which the company
has historically produced. Th e costs to produce one fastener (based on capacity
operation of 4,000,000 units per year) are:
Direct material $0.08
Direct labor 0.06
Variable factory overhead 0.04
Fixed factory overhead 0.07
Fixed factory overhead includes $100,000 of depreciation on equipment for which there
is no alternative use and no market value. Th e balance of the fi xed factory overhead
pertains to the salary of the production supervisor, Jeff Wittier. Wittier has a lifetime
employment contract and the skills that could be used to replace Brenda Gibbons, supervisor
of fl oor maintenance. She draws a salary of $50,000 per year but is due to retire
from the company.
Saratoga Suitcase Co. recently approached Louisiana Luggage Components with
an off er to supply all required fasteners for $0.19 per unit. Anticipated sales demand
for the coming year will require 4,000,000 fasteners.
a. Identify the costs that are relevant in this outsourcing decision.
b. What is the total annual advantage or disadvantage (in dollars) of outsourcing the
fasteners rather than making them?
c. What qualitative factors should be taken into account in making this decision?
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