Big Lu sells iPad cases with the LU logo emblazoned on it. Currently, the cases

Question

Big Lu sells iPad cases with the LU logo emblazoned on it. Currently, the cases are being outsourced from a supplier in China. However, they are considering manufacturing the cases in house. Big Lu is going to sell the cases for $20 each. Big Lu knows he can sell at least 15,000 cases, but he wonders if that will be enough to cover the fixed costs of the machinery and setup. These costs have been estimated at $300,000. Additionally, Big Lu tells you he can purchase the cases from China for $10 each. He also estimates the variable costs to make them in house is $7 each. 1. Should Big Lu make the cases in house or purchase them from China? 2. How many units would Big Lu have to sell to make his optimal decision change? (Hint: Adjust the production volume until the Cost Difference (In-house—Outsourced) = $0. 3. At the sales volume of 15,000 units, how much profit will the company make if they follow your suggestion? 4. What are some other variables that must be considered when making the decision to make the cases in-house or outsource? Name at least three and why those are important to the decision. Use Excel to produce the numbers

Explanation / Answer

4. Skills availability/Raw material availability considered while taking decision to make In-house and Reliability Quality levels and lead times of supplier are tobe to be considered while outsourcing.

Demand in units 15,000 Fixed Cost $ 300000 Variable Cost /unit $ 7 Purchase Price/unit $ 10 Selling price/unit $ 20 BEP 100000 Total Cost of Mfg 405000 Total Cost of Buying 150000 1 Buying is cheaper 2 Break Even Point, BEP (Min. qunatity need to sell) 31153.85 3 Profit at 15000 units buying 150000

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