Solution-Determine the annual costs to be incurred

Determine the annual costs to be incurred

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Reference no: EM133130448

Question - Below is an extract from the business activities of TATA Plc. This company currently manufactures 20,000 motor brake pads per year. Cost information obtained from the company is as follows:

	Total (£)	per unit (£)
Direct materials	240,000	12
Direct labour	200,000	10
Variable manufacturing
Overhead costs	20,000	1
Fixed manufacturing
Overhead costs	140,000	7
Share of non-manufacturing
Overheads	80,000	4
Total costs	680,000	34

One of TATA's Chinese suppliers has offered to supply 20,000 brake pads per year at £28 per unit for a minimum of three years. If TATA outsources the manufacturing of the brake pads, the direct labour will made redundant. Direct material and variable overhead costs will be avoided. Fixed manufacturing overhead costs would be reduced by £25,000 per year, but non-manufacturing overhead costs will not change.

Note: The capacity to be released from outsourcing the brake pads have no alternative use for TATA.

Required -

1. Considering the information provided above, determine the annual costs to be incurred / saved by TATA in the production of the brake pads.

2. Should TATA MAKE or BUY the brake pads. Give reasons.

Reference no: EM133130448

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Determine the annual costs to be incurred

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