Question

A company needs 10,000 units of a component used in producing one of its products. The latest internal accounting reports show that the per unit manufacturing cost to be $150.00, variable manufacturing costs of $110.00 and fixed manufacturing cost of $40. The company recently received an offer from another manufacturer to produce the component for $144.00. If it buys the component on the outside 40% of the fixed manufacturing cost can be avoided. Required: a. If the company buys the component from the outside supplier at $144.00, what is the impact on income? b. What price would make the company indifferent between making the component internally and having the outside supplier make it?

Answer 1

A) The outsourcing costs $18 more per unit. It increases the cost by $18000

B) Price= $126

Step-by-step explanation:

Giving the following information:

Q= 10000 units

In-house:

Variable manufacturing cost= $110 unit

Fixed cost= $40 unit

Total cost= $150 unit

Outsource:

Price=$144 unit

Fixed cost= $40*0,60= $24

Total cost= $168

A) The outsourcing costs $18 more per unit. It increases the cost by $18000

B) The price that makes the decision indifferent is the one that equals unitary costs. We can't reduce fixed costs.

Price=144-18= $126