Detailed Cost Analysis Report: Valve Production Decision Making

This report provides a cost analysis for a company deciding whether to manufacture valves in-house or outsource production. The analysis examines the costs associated with material, labor, and potential setup expenses at different production volumes (1000, 2000, and more than 4000 valves per week). The report calculates the cost per valve under each scenario, comparing in-house production costs to the external supplier's price of $50 per valve. The analysis reveals potential cost savings at different production levels. The report also highlights the optimal production quantity to maximize savings, identifies the potential savings at different production volumes, and suggests additional data needed for a more comprehensive decision-making process, including costs at 3000 valves and setup costs for production exceeding 4000 units. The report also discusses the flexibility and quality control advantages of in-house production.

COSTING

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
QUESTION.....................................................................................................................................1
A/ At what volume per week does it make sense to bring the work in-house?...........................1
B/ How much money could the company save by making the valves in house if the volume
goes over 4000/week?..................................................................................................................2
C/ How much money will the company save by buying the valves from the external source if
the volume is approx 1000/week?...............................................................................................2
D/ What additional data or information would the management need to help them make the
decision?......................................................................................................................................2
REFERENCES................................................................................................................................3

QUESTION
In the present case company is using valve as part of the larger assembly. In the plant it
should assembling valves and other components, packing and shipping them to warehouse for
the sales and storage. Company is buying valves from the manufacturer at the cost of 50 per
valve at any volume. Company wants to evaluate the in house production of the valves.
Company has performed the evaluation for saving money by making inhouse production.
A/ At what volume per week does it make sense to bring the work in-house?
1000 per week 2000 per
week
<4000
per week
>4000
per
week
Cost of Material 14000 24000 36000 28000
Cost of labour 6660 13340 26660 26660
Total Direct cost 20660 37340 62660 54660
Cost per valve 20.66 18.67 15.665 13.665
Cost of labour
min/ valve 20 per/hour
1000 valve 20000 333
2000 valve 40000 667
4000 valve 80000 1333
It could be evaluated from the above evaluation that the cost of purchasing the valve from
outside is 50 per valve. The in-house production will enable the company to save considerable
cost for the business. There are number of reasons for manufacturing in-house rather than
outsourcing of the production. The cost of making 1000 valve will be 20.66 per valve, 2000
valve for 18.67 per valve, less than 4000 will have cost of 15.66 and if the company produces
more than 4000 the cost per valve is 13.67 plus the additional setup cost. The in-house
production will give company more flexibility to the business for altering as required. It also
enables company to have high quality control over production of the different units.
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If the company is proposing to make in-house production it should produce more than
2000 but less than 4000. It will be the most optimum quantity that company will produce per
week.
B/ How much money could the company save by making the valves in house if the volume goes
over 4000/week?
Saving in material cost 50 - 13.665
36.335
145340
If the company produces over 4000 the savings in cost will be 36.335 as the cost of materials
will be decreased to 7 for over 4000 valves. However it will have to incur additional cost over
4000 which will reduce savings.
C/ How much money will the company save by buying the valves from the external source if the
volume is approx 1000/week?
Cost of Material 50 -20.66 =
29.34
Saving in cost @1000 29340
If the company produces 1000 it will be saving 29340.
D/ What additional data or information would the management need to help them make the
decision?
For making more detailed analysis it is required to analyse the cost at 3000 valve of
materials. It also requires further details of the additional cost that will be incurred from
producing over 4000. It is also required to assess the set up cost.
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REFERENCES
Books and Journals
Online
[Online]. Available through : <>.
[Online]. Available through : <>.
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