2.1 Identify the costs that are relevant in this outsourcing decision.
In making an outsourcing decision, the relevant costs are those that will be impacted by the decision to either produce the fasteners in-house or outsource them. These costs typically include variable costs and any avoidable fixed costs. Fixed costs that will not change regardless of the decision (e.g., unavoidable fixed costs) are not relevant.
Relevant Costs:
Direct material (R0.08 per unit): This cost will be avoided if production is outsourced.
Direct labour (R0.06 per unit): This cost will be avoided if production is outsourced.
Variable factory overhead (R0.04 per unit): This cost will be avoided if production is outsourced.
Fixed factory overhead – R150,000 for Jeff Witter's salary: While Jeff Witter’s salary is a fixed cost, his replacement of Brenda Gibbons after her retirement could eliminate the need for one of these supervisors. If Witter takes over Gibbons' role, some portion of this fixed overhead could be saved, making it relevant to the decision.
Non-Relevant Costs:
Fixed factory overhead – R200,000 depreciation: This is a sunk cost and cannot be avoided by outsourcing, so it is not relevant.
R50,000 salary of Brenda Gibbons: This will be eliminated once she retires, irrespective of the decision to outsource.