Question

A manufacturing firm has an annual demand of 300,000 units. Using its current operation, the firm pays $800,000 in annual fixed costs and $15.00 per unit in variable costs. A potential outsourcing provider has offered to produce the product for the manufacturer. Annual fixed costs would drop to $200,000, but variable costs would increase to $18.00 per unit. Based on this information, what should the manufacturer do

Answer 1

It is cheaper to make the units in-house by $300,000.-

Step-by-step explanation:

First, we need to calculate the total avoidable production costs of making 300,000 units:

Total variable cost= 300,000*15= $4,500,000

Total avoidable fixed cost= 800,000 - 200,000= $600,000

Total production cost= $5,100,000

Now, the total differential cost of buying:

Cost of buying= 300,000*18= $5,400,000

It is cheaper to make the units in-house.