Marine International manufactures an aquarium pump and is trying to decide wheth

Question

Marine International manufactures an aquarium pump and is trying to decide whether to produce the filter system in-house or sign an outsourcing contract with Bayfront Manufacturing to make the filter system. Marine's expertise is producing the pumps itself, but it is considering producing the filter system also. To establish a filter system production at Marine International, the fixed cost is $400,000 per year, and it estimates the variable cost of production in-house at $12.25 per filter system. If Marine outsources the production of the filter system to Bayfront, Bayfront will charge Marine $20 per filter system. Should Marine International outsource the production of the filter system to Bayfront if Marine sells 25,000 pumps a year ?      please calculate so I can have a clear understanding of this problem, thank you.

Explanation / Answer

Below are the calculations:

Assumptions: 1 filter system required for 1 pump. Fixed costs are utilized only for filter system production

Based on the above calculations, it is clear that purchasing from Bayfront is cost effective compared to inhouse production. With number of units being only 25000, fixed cost per unit is coming to 16$, thus not achieving efficiencies of scale.

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