1. Boys \'R Us sells suits to young men. Management is considering vertical inte

Question

1. Boys 'R Us sells suits to young men. Management is considering vertical integration. It is determined that the company can produce its own suits for a fixed annual cost of $2,000,000 and a production cost of $120 per suit. The current demand is 25,000 units. A potential supplier charges a $2,500,000 fixed annual cost. (3 points) What will be the variable cost per unit can the potential supplier charge that would make the total costs of the supplier indifferent from Boys' R Us? (2 points) 1) 2) Please list factors other than costs that need to be considered for outsourcing (1 point)

Explanation / Answer

1) In order for the supplier to be indifferent from Boys R Us, the total cost of the operation should be the same. In case of vertical integration the total cost is

2000000 + 25000*120 = 5000000

Now, the supplier charges a fixed cost of 2500000. Thus the variable cost should be X and the values should equate.

25000000 + 25000X = 5000000

X = 100

The supplier should charge $100 per suit in order to be indifferent from the in house manufacturing.

2) Other factors that need to be considered are

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