Question 9

Question 9 – Staniland Ltd

Staniland Ltd manufacture electronic weighing equipment for use on transport and weighbridges.

All the parts are made in-house from raw materials. The company is considering buying in a certain type of unit “XL3” so that production facilities can be released so that the business can work on a new product, “XL20”.

The cost of making per unit “XL3” with a current level of output of 4000 per year is:

		£
	Direct Materials	42
	Direct Labour	23
	Variable Overheads	18
	Fixed Overhead	17
		100

An outside supplier has quoted a price of £96 per unit.

If the “XL3” is outsourced, the company will be able to produce and sell 800 “XL20” the new product. An “XL20” has a selling price of £300 and variable costs per unit of £200.

Question

Advise the management of Staniland Ltd whether or not, in financial terms, the “XL3” units should be outsourced.