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Insourcing/Outsourcing Case:
The FlexCon Piston Decision
Instructor's Guide
Instructor's Guide
The following describes how to arrive at the key numbers required to complete Appendix 13.
This case requires the participant to calculate insourcing and outsourcing costs on a perunit
basis.
One objective of this case is to familiarize participants with the idea of total cost, and to
become accustomed to allocating costs on a per unit basis.
Total cost per unit cost allocation
allows valid comparisons between insourcing and outsourcing options.
INSOURCING COSTS
Direct Materials Costs
When calculating direct material costs, the key numbers involve last year's production, the cost
per 50 lb. block, and the average semifinished raw material required for each finished piston.
First, 50 lb./1.1 lb. required for each piston = 45.45 piston yield per block
(288,369 pistons produced last year)/45.45 pistons per block = 6,345 blocks
6,345 blocks x $195 per block = $1,237,275 total direct material costs for blocks to support
previous year's production
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($1,237,275)/(288,369 last year's output) =
$4.29
direct material alloy cost per piston.
Since the
team expects material costs to remain constant, this figure applies to Year One and Two.
FlexCon also spent $225,000 last year on other miscellaneous direct material.
($225,000)/(288,329) =
$.78
additional direct material costs
Direct Labor Costs
Several methods are available to calculate direct labor costs given the information in the case.
The direct labor employed in the three work cells worked a total of 27,000 hours last year,
produced 288,329 pistons, and received $472,500 in direct salary.
$472,500 direct salary x 1.40 (addin fringe benefits) = $661,500 total compensation
($661,500)/(288,369 previous year production) = $2.30 direct labor per unit
Year One: $2.30 x 1.03 (expected direct labor cost increase) =
$2.37
Year Two: $2.37 x 1.03 (expected direct labor cost increase) =
$2.44
Alternate Calculation:
Year One: $17.50 per hour compensation rate (see case for calculation) x 1.40 (fringes) x 1.03
(expected wage increase) = $25.23 (Year One total direct labor cost per hour)
(288,369 last year's production)/(27,000 last year's total direct hours) = 10.68 pistons per hour
300,000 (Year One expected production)/10.68 pistons per hour = 28,090 total required hours in
Year One
28,090 total required hours x $25.23 Year One total direct labor cost per hour = $708,710 total
Year One direct labor compensation
$708,710 (total Year One direct labor compensation)/300,000 (expected Year One production)
=
$2.36
(difference from $2.37 due to rounding)
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This note was uploaded on 04/21/2011 for the course MGT 01 taught by Professor Gad during the Spring '11 term at Tanta University.
 Spring '11
 GAD

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