TO: Jerry’s President
FROM: XYZ Consulting Company
CC:
DATE: 05/06/2018
Subject: Recommendation on Outsourcing or In-House Production
In scenario 1, Jerry’s should consider producing all the three items in-house since more profit is obtained when production is done by the company as compared to outsourcing. The net profit obtained if countertops are produced in-house is $ 48,720,000 while that obtained when Jerry’s outsources the countertops is $ 43,848,000 thus it should start production as soon as possible. Producing cabinets in the facility would result in a net profit of $ 8,700,000 while outsourcing the same would result in $ 7,500,000 which means Jerry’s should also produce cabinets in-house. The picnic tables should also be manufactured inside the facility since it would to a higher profit of $ 17,900,000 as compared to outsourcing which would have a net profit of $ 16,000,000.
In the second scenario, Jerry’s should consider outsourcing picnic tables while manufacturing the cabinets and countertops in-house. When produced in-house, the countertops lead to a higher profit of $ 44,335,200 compared to $ 43,848,000 which is as a result of outsourcing. The production facility should also start manufacturing cabinets as soon as possible since the profits will higher by a margin of $ 150,000. The picnic tables, on the other hand, would result in increased profits of $ 16,000,000 if Jerry’s chose to outsource them instead of producing them which would lead to lower profits of $ 15,600,000.
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The third scenario would require Jerry’s to outsource the countertops since this would lead to higher profits of $ 43,848,000 while producing the same would result in $ 40,924,800 profit. The cabinets, on the other hand, would lead to equal profits of $ 7,500,000 hence other factors such as lead times as a result of outsourcing them should be considered. Jerry’s should produce the picnic tables since the profit is higher by $ 500,000 compared to when it outsources them.
Summarized Table of Elements Relevant to the Decision
| Items | Relevance |
| The unit sales prices | The unit sales prices are not relevant to Jerry’s decision since it does not affect the cost of producing the items. |
| The outside supplier’s price | This affects Jerry’s decision since if the supplier reduced their prices; Jerry’s net profits would increase. |
| The direct materials, direct labor, and variable overheads. | They influence the decision since a reduction in these costs would mean reduced production costs, hence increased profits. |
| The president’s salary. | The president’s salary is not a component of direct costs which affect the production costs of the items hence it would not affect Jerry’s decision. |
Calculations of the Three Scenarios
Scenario #1
Countertops
| Cost per unit ($) | Number of units | Total costs ($) | |
| Direct materials | 15 | 487,200 | 7,308,000 |
| Direct labor | 10 | 487,200 | 4,872,000 |
| Variable manufacturing overheads | 5 | 487,200 | 2,436,000 |
| Total costs | 14,616,000 |
Net profit
63,336,000-14,616,000= $ 48,720,000
In case Jerry’s outsources the countertops, the net profit will be as follows;
63,336,000-19,488,000= $ 43,848,000
The countertops should be manufactured by the production facility since it results in higher profits of $ 48,720,000.
Cabinets
| Cost per unit ($) | Number of units | Total costs ($) | |
| Direct materials | 10 | 150,000 | 1,500,000 |
| Direct labor | 5 | 150,000 | 750,000 |
| Variable manufacturing overheads | 2 | 150,000 | 300,000 |
| Total costs | 2,550,000 |
Net profit
11,250,000-2,550,000= $ 8,700,000
In case Jerry’s outsources the cabinets; the net profit will be as follows;
11,250,000-3,750,000= $ 7,500,000
The cabinets should be produced in Jerry’s facility since a higher profit of $ 8,700,000 would be obtained.
Picnic Tables
| Cost per unit ($) | Number of units | Total costs ($) | |
| Direct materials | 25 | 100,000 | 2,500,000 |
| Direct labor | 15 | 100,000 | 1,500,000 |
| Variable manufacturing overheads | 6 | 100,000 | 600,000 |
| Total costs | 4,600,000 |
Net profit
22,500,000-4,600,000= $ 17,900,000
Incase Jerry’s outsources the picnic tables, the net profit will be as follows;
22,500,000-6,500,000= $ 16,000,000
The picnic tables should be produced in-house since it results to higher profits of $ 17,900,000.
Scenario #2
Countertops
| Cost per unit ($) | Number of units | Total costs ($) | |
| Direct materials | 19 | 487,200 | 9,256,800 |
| Direct labor | 13 | 487,200 | 6,333,600 |
| Variable manufacturing overheads | 7 | 487,200 | 3,410,400 |
| Total costs | 19,000,800 |
Net profit
63,336,000-19,000,800= $ 44,335,200
In case Jerry’s outsources the countertops, the net profit will be as follows;
63,336,000-19,488,000= $ 43,848,000
The countertops should be produced in-house since it results to higher profits.
Cabinets
| Cost per unit ($) | Number of units | Total costs ($) | |
| Direct materials | 12 | 150,000 | 1,800,000 |
| Direct labor | 9 | 150,000 | 1,350,000 |
| Variable manufacturing overheads | 3 | 150,000 | 450,000 |
| Total costs | 3,600,000 |
Net profit
11,250,000-3,600,000= $ 7,650,000
In case Jerry’s outsources the cabinets; the net profit will be as follows;
11,250,000-3,750,000= $ 7,500,000
Jerry’s profits would be higher by $ 150,000 hence it should produce the cabinets in the facility.
Picnic Tables
| Cost per unit ($) | Number of units | Total costs ($) | |
| Direct materials | 36 | 100,000 | 3,600,000 |
| Direct labor | 24 | 100,000 | 2,400,000 |
| Variable manufacturing overheads | 9 | 100,000 | 900,000 |
| Total costs | 6,900,000 |
Net profit
22,500,000-6,900,000= $ 15,600,000
In case Jerry’s outsources the picnic tables; the net profit will be as follows;
22,500,000-6,500,000= $ 16,000,000
Jerry’s should outsource the picnic tables since the profit margin is higher compared to producing the same.
Scenario #3
Countertops
| Cost per unit ($) | Number of units | Total costs ($) | |
| Direct materials | 22 | 487,200 | 10,718,400 |
| Direct labor | 15 | 487,200 | 7,308,000 |
| Variable manufacturing overheads | 9 | 487,200 | 4,384,800 |
| Total costs | 22,411,200 |
Net profit
63,336,000-22,411,200= $ 40,924,800
In case Jerry’s outsources the countertops; the net profit will be as follows;
63,336,000-19,488,000= $ 43,848,000
The profits would be higher in case Jerry’s outsources the countertops, hence it is preferred.
Cabinets
| Cost per unit ($) | Number of units | Total costs ($) | |
| Direct materials | 15 | 150,000 | 2,250,000 |
| Direct labor | 7 | 150,000 | 1,050,000 |
| Variable manufacturing overheads | 3 | 150,000 | 450,000 |
| Total costs | 3,750,000 |
Net profit
11,250,000-3,750,000= $ 7,500,000
In case Jerry’s outsources the cabinets; the net profit will be as follows;
11,250,000-3,750,000= $ 7,500,000
The company should consider other factors that would affect the supply of the cabinets since the profits are equal. Such factors would include increased lead times as a result of outsourcing.
Picnic Tables
| Cost per unit ($) | Number of units | Total costs ($) | |
| Direct materials | 31 | 100,000 | 3,100,000 |
| Direct labor | 18 | 100,000 | 1,800,000 |
| Variable manufacturing overheads | 11 | 100,000 | 1,100,000 |
| Total costs | 6,000,000 |
Net profit
22,500,000-6,000,000= $ 16,500,000
In case Jerry’s outsources the picnic tables; the net profit will be as follows;
22,500,000-6,500,000= $ 16,000,000
In this case, the picnic tables should be produced in-house, since the profit is higher.
