Outsourcing Tuff Tach produces pickup truck bumpers that are sold on a wholesale

Question

Outsourcing Tuff Tach produces pickup truck bumpers that are sold on a wholesale basis to new car retailers. The average bumper sales price is $170. Normal annual sales volume is 300,000 units, which is the company’s maximum production capacity. At this capacity, the company’s per-unit costs are as follows:

A key component in producing bumpers is the mounting hardware used to attach the bumpers to the vehicles. Birmingham Mechanical has offered to sell Tuff Tach as many mounting units as the company needs for $20 per unit. If Tuff Tach accepts the offer, the released facilities currently used to produce mounting hardware could be used to produce an additional 4,800 bumpers. What alternative is more desirable and by what amount? (Assume that the company is currently operating at its capacity of 300,000 units.)

Explanation / Answer

To produce is more desirable then to outsource as the revenue decreases if outsourced even if extra units are manfactured by the facility and sold.

Hope this helps.

Including Cost of mounting Excluding Cost of Mounting Number of Units Total Cost Excluding Mounting Total Cost Including Mounting Direct material 53 38            300,000 11,400,000 15,900,000 direct labor 17 17            300,000    5,100,000    5,100,000 overhead(2/3 is fixed) 30 30            300,000    9,000,000    9,000,000 Overhead 1/3 variable 15 15            300,000    4,500,000    4,500,000 Total Cost 115 100            300,000 30,000,000 34,500,000 Cost of mounting if outsourced 20 20            300,000    6,000,000 36,000,000

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