Pearson Company manufactures a variety of electronic printed circuit boards (PCBs) that go into cellular phones. The company has just received an offer from an outside supplier to provide the electrical soldering for Pearson’s Motorola product line (Z-7 PCB, slimline). The quoted price is $4.80 per unit. Pearson is interested in this offer, since its own soldering operation of the PCB is at its peak capacity.
• Outsourcing option. The company estimates that if the supplier’s offer were accepted, the direct labor and variable overhead costs of the Z-7 slimline would be reduced by 15% and the direct material cost would be reduced by 20%.
• In-house production option. Under the present operations, Pearson manufactures all of its own PCBs from start to finish. The Z-7 slimlines are sold through Motorola at $20 per unit.
Fixed overhead charges to the Z-7 slimline total $20,000 each year. The further breakdown of producing one unit is as follows:Direct materials$ 7.50Direct labor5.00Manufacturing overhead Total cost4.00 $16.00
The manufacturing overhead of $4.00 per unit includes both variable and fixed manufacturing overhead, based on a production of 100,000 units each year.
(a) Should Pearson Company accept the outside supplier’s offer?
(b) What is the maximum unit price that Pearson Company should be willing to pay the outside supplier?