A furniture manufacturer is assessing whether it should make or buy the wooden f

Question

A furniture manufacturer is assessing whether it should make or buy the wooden frames for upholstered dining room chairs. The forecast is for 125,000 chairs to be produced per year. The fixed costs per year to make the frames are $202,000 and the variable costs are $8/frame. The supplier’s bid is $8/frame.

A furniture manufacturer is assessing whether it should make or buy the wooden frames for upholstered dining room chairs. The forecast is for 125,000 chairs to be produced per year. The fixed costs per year to make the frames are $202,000 and the variable costs are $8/frame. The supplier’s bid is $8/frame.

Explanation / Answer

                          CTM= 202000+ (8*125000) = 1202000 $

a) Total Cost insource = 1202000 $

Total cost outsource= 1000000$

b) Since evaluating both the options , we only have to take variable cost of manufacturing which is $8 per frame . This is same as the supplier's bid of $8 per frame. So, both the options of outsourcing and insourcing are equal.

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