Group 3

PRESENTATION

OUTSOURCING /
MAKE OR BUY
DECISION
CASE STUDY

Worldwide Airways
Ellie Rickenbacker is Worldwide Airways’ manager of in-flight services.
She supervises the airline’s flight attendants and all of the firm’s food
and beverage operations. Rickenbacker currently faces a decision
regarding the preparation of in-flight dinners at the airline’s Atlanta
hub. In the Atlanta flight kitchen, full-course dinners are prepared and
packaged for long flights that pass through Atlanta. In the past, all of
the desserts were baked and packaged in the flight kitchen. However,
Rickenbacker has received an offer from an Atlanta bakery to bake
the airline’s desserts. Thus, her decision is whether to outsource the
dessert portion of the in-flight dinners given that the Atlanta bakery
has offered to supply the desserts for 21 cents each.
COST OF MAKING
CASE STUDY

Worldwide Airways

Make = 25 cents
Buy = 21 cents

It appears that the airline would save 4 cents per

dessert. However, not all of the costs listed are
relevant to the outsourcing decision.
COSTS SAVED BY PURCHASING
 Worldwide Airways
CASE STUDY

If Worldwide Airways stops making desserts, it will save all

of the variable costs but only 1 cent of fixed costs. The
1-cent saving in supervisory salaries would result because
the airline could get along with two fewer kitchen
supervisors. The remainder of the fixed costs would be
incurred even if the desserts were purchased. These
remaining fixed costs of supervision would have to be
reallocated to the flight kitchen’s other products.
The total cost of producing 1,000,000 desserts
(Flight kitchen’s average monthly volume)
CASE STUDY Worldwide Airways
Beware to Unit-Cost Data
Fixed costs often are allocated to individual units of product or service for
product-costing purposes. For decision-making purposes, however, unitized
fixed costs can be misleading. As the total-cost analysis shows only $10,000
in fixed monthly cost will be saved if the desserts are purchased. The
remaining $100,000 in monthly fixed cost will continue whether the
desserts are made or purchased.

The initial cost analysis implies that each dessert costs the airline 25 cents,
but that 25-cent cost includes 11 cents of unitized fixed costs. Most of
these costs will remain unchanged regardless of the outsourcing decision. By
allocating fixed costs to individual products or services, they are made to
appear variable even though they are not.
CASE STUDY

Worldwide Airways

CONCLUSION:

To outsource the desserts would require an expenditure

of 21 cents per dessert, but only 15 cents per dessert
would be saved.
Therefore, the airline should continue to make its own
desserts.
CASE STUDY

REMINDER:

If in different situation, Worldwide Airways find a

supplier that will offer less than 15 cents per
dessert, it is essential that they work with a
company that they can rely on for the long-term.
 Thank You

BOOK REFERENCE
MANAGERIAL ACCOUNTING : CREATING VALUE IN A DYNAMIC BUSINESS
ENVIRONMENT / RONALD W. HILTON.—9TH ED