Relevant Cost Case Behemoth Motors Corp



Relevant Cost Case Behemoth Motors Corp

Introduction

Behemoth Motor Corporation has two options available for GPSN; first option is to make the product in house and the second option is to outsource the product to FEE. FEE is a reliable company, currently conducting its business in China and experiencing a tremendous growth and reputation over three years. The existing cost structure of the company is;

Item

Cost per unit

Direct materials (purchased locally)

$165

Direct labor (6 hours @ $28 per hour)

168

Factory Floor Space Charges (16,000 sq. ft. at $2.50 per sq. ft. per month allocated over 8,000 units per month)

5 

Supervisory labor (monthly cost of $56,000 allocated over 8,000 units per month)

7 

General company overhead ($640,000 per month assigned to GPSN allocated over 8,000 units per month)

80

Total Unit Cost

$425

Background Information

First problem, which will be incurred by the BMC, will be the laying of the employees. The total costs will result in 66000 for 4 years. This will accumulate to 66000 x 4 = $264000. This amount will be going towards the employees union as a penalty.

There is an opportunity cost involved in purchasing the contract with FEE. The company cannot switch for better alternatives in the supplier industry for two years, as per the contract.

The quality deterioration may occur, however FEE has promised that the quality will be according to the specifications provided by the company. The company might need to switch to different technology, which may not be provided by the FEE. Technology is consistently changing and new products are coming, BMC cannot shift towards new products until the contract gets over.

The supervisory costs and number will remain the same, as they will be re allocated in the operations, but will be removed from the product. The factory space can be utilized as $5000 is paid in ...