Reference no: EM132541876

Chittagong Sisters manufactures sweaters. A label is attached with each sweater with printed information about the product. The costs to produce each label (based on a production volume of 400,000 units of sweaters per year) are:

Direct Material                      Tk. 1.0

Direct Labor                           Tk. 0.5

Variable MOH                            Tk. 0.3

Fixed MOH                                    Tk. 1.5

Total                                              Tk. 3.3

• Fixed MOH includes Tk. 100,000 of depreciation on equipment for which there is no alternative use and no market value.

• Tk. 200,000 of the fixed MOH are allocated fixed costs that will continue even if production of the labels is discontinued.

• The production manager who currently oversees production of the labels has worked for the firm for 10 years and the firm has no intention of firing him even if production of the labels is stopped. The production manager draws a salary of Tk. 50,000 and will be reassigned to some other position in the firm.

• Tk. 250,000 of the fixed MOH identified as production cost of labels can be avoided if production of the labels is stopped.

Problem 1: Sylhet Manufacturers has offered to sell any quantity of labels needed by Chittagong Sisters at a price of Tk. 1.5 per unit. Managers at Chittagong Sisters are perplexed by the offered price, since it is even less than the variable cost of producing a label by the firm. Upon some investigation it appears that, Sylhet Manufacturers is using child laborers to work in its factory. These children are poverty stricken and paid very little wages. Chittagong Sisters' procurement manager suggests that the company should outsource manufacturing of the labels because "no one can blame us for the supplier's hiring practices and if those practices come to light, no one will be able to show that we knew of those practices." What do you think Chittagong Sisters should do, and why?