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 1-3. This case requires the participant to calculate insourcing and outsourcing costs on a per-unit 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 semi-finished 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