principle of opportunity cost, Financial Management

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Suppose you have recently been contracted as a financial consultant to a London-based engineering company, Alpha Products Plc. The company uses three components as part of their production process, namely, A, B and C. The budgeted production output for the forthcoming year is to produce 10,000 of each of the three components.

The variable production cost per unit of the final product is as follows:

Only 112,000 hours of machine time will be available during the year, and a sub-contractor has quoted the following unit prices for supplying the three components: A £72.50; B £100 and C £88.

Required:

Write a short report, intended for CEO of Alpha Products Plc, William Smith, who is not an accountant, advising him of the following:

(a) Using the above financial data provide calculations which support your advice to the company on whether it should produce the three components or outsource them.

(b) Explain the use of the principle of opportunity cost and why cost- minimisation and profit maximisation are compatible concepts and include a table showing the total variable cost of your selected production or purchasing plan.

(c) Critically discuss the practice of outsourcing and the problems you consider may be associated with this practice.

(d) Structure and presentation of the report

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