Financial Accounting Essays

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Managing Director
GNK Manufacturing Limited
Report of - Decision Marking, the outsourcing decision

Executive Summary

The limited factor is the machine hours, there are not enough machines hours to produce all there products.

Plan with no outsourcing generates profit of $48,000.

Short of 400 units of DS2 by accepting current plan with no outsourcing allowed.

By accepting plan with allowing outsourcing, w meet the market demand and increase profit.

But, there are risks involving with this plan, such as losing of managerial control, quality problem, company reputation , intelligence property and copy right.

There are several ways to manage our outsourcing product. Such as, we need to have a enforceable contract and monitor the performance of the outsourcing vendor.

Introduction
The following report will help management to make decision of outsourcing when there is a constraint. Firstly, we will calculate the maximum profit of production plan with no outsourcing and expected profit. Then, we will compare this plan with allowing outsourcing and analysis the advantages and disadvantages. Finally, we will make some suggestions to minimizing the risk involving in allowing outsourcing.

Main report

Q(a)
Calculation of contribution per machine hour DS1 DS2 DS3 $ $ $

Selling price 2500 2430 2590
- variable cost 1630 1350 1750
=contribution/unit 870 1080 840
÷machine hours 6 9 3
=contribution/machine hour 145 120 280

Rank 2 3 1

Production plan - No outsourcing

Unit × hours/unit = total hours × contribution/hour = contribution($)

DS3 800 3 2400 280 672,000
DS1 600 6 3600 145 522,000
DS2 300 9 2700 120 324,000
Total contribution 1518,000
－less fixed costs 1470,000
=expected profit 48,000

Q(b)
The production plan with no outsourcing is a poor performance plan and there is a potential risk of losing more sales.
Firstly, the profit is quite low, only $48,000 about 1% return on sales. We loss 400 units slaes of GS2. We could increase the profit by outsourcing GS2.
Second, the plan hurts our reputation. We will not only loss 400 units of GS2. The customers buy GS2 may also buy GS1 and GS3 from us. They will take their business to someone else including GS1 na GS3 if we can not supply enough GS2. So we will loss more sales than 400 units of GS2. It is hard to get them back or find any new customers as we are focusing on the local market only.

Q(c)
Advantages of allowing outsourcing
We can meet the demand of all three products, especially DS2. Therefore, our profit will be increased.
We will keep the customers happy by meeting their demand and they will stay with us.

Disadvantages of allowing
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