Cost and management Accounting
CSK Company Limited has received an order to manufacture a special product and certain part of the product could be outsourced. Currently the company is considering of buying that part outside.
The following information relates to the unit cost of making the part in-house:
Direct Material 270.00
Direct Labour 150.00
Variable Overhead 30.00
Depreciation of special equipment 90.00
General Factory Overhead 300.00
i. General factory overhead is allocated on the basis of direct labour hours and is not going to change if the parts are bought from outside.
ii. The GH¢900.00-unit cost is based on 20,000 parts produced each year by Big-Ben Company Limited.
iii. An outside supplier has offered to provide the 20,000 parts at a unit cost of GH¢700.00 per part.
You are requested as the Management Accountant to advice with evidence whether CSK Company Limited should accept the supplier’s offer or not.