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Finance & Accounting
Pages 4 (1004 words)
UGC Plc has decisions to make regarding the construction of the new system whether to carry the project in house or outsource the project to a subcontractor. The analysis and better decision making can be done by discussing the components of cost and their effects on the overall cost and final decision to be taken. …
The analysis and better decision making can be done by discussing the components of cost and their effects on the overall cost and final decision to be taken. All the costs that can affect the decision, rather all the relevant costs should be considered in this case. It is important to distinguish between relevant and irrelevant costs for the decision making purposes as it allows better decision making for cost reduction and cost maximization. Additionally overheads allocation should also be done on fairer and activity driven basis so that better decisions can be taken. (DRURY, C. 2008; HANSEN, MOWEN, & HANSEN.2006) The company shall lay150 meters of pipe each week in-house to utilize its labour and machine, however decision has to be taken for the remaining 750 meters for small pipe and 300 meters of large pipe to be laid in-house or subcontracted. Direct Material Cost: The company has an option to subcontract the project where the material cost will be borne by subcontractor, charged by UGC in the price quoted. On the other hand the company if undertakes the project in-house the direct material cost will be ?45/per meter on small pipe and ?55/meter on large pipe. Direct Labour Cost: Company can use in-house labour by shifting labour from other departments, there will be no opportunity cost involved as the company has substitute labour to be used in other department on the same rate. ...
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