#11 . Suppose that a manufacturer can produce a part for $10.00 with a fixed cos

Question

#11 . Suppose that a manufacturer can produce a part for $10.00 with a fixed cost of $5,000. The manufacturer can contract with a supplier in Asia to purchase the part at a cost of $12.00, which includes transportation.

a.       If the anticipated production volume is 1,200 units, compute the total cost of manufacturing and the total cost of outsourcing. What is the best decision?

b. Find the break-even volume and characterize the range of volumes for which it is more economical to produce or to outsource.

Explanation / Answer

A.

B.

The difference in cost is 12-10 = 2

So the margin is $2

And so units U is the break even

So 5000 = 2U

So U = 2500

At this units:

So till 2500 units outsourcing is best option after that manufacturing is better.

Manufacture Outsourcing Asia F Fixed cost 5000 V Variable cost 10 12 U Units 1200 1200 T=F+VU Total cost 17000 T=VU 14400 Outsourcing to Asia is the best decision

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