Final answer:
The company should produce the item in-house since it's cheaper at $620,000 compared to the $720,000 cost of outsourcing for 9,000 units. The breakeven point is 7,000 units, beyond which in-house production is more cost-effective. Therefore, in-house production is the best choice for the requirement of 9,000 units.
Step-by-step explanation:
Cost Analysis for In-House vs. Outsourcing
To determine whether the company should make the specialty molding in-house or outsource it, we need to compare the total costs for both options at the requirement level of 9,000 units. For in-house production, the total cost is the sum of the fixed cost and the variable costs for the 9,000 units. The formula for in-house production cost is:
Total In-House Cost = Fixed Cost + (Variable Cost per Unit × Number of Units)
For outsourcing, the total cost is simply the number of units multiplied by the cost per unit:
Total Outsourced Cost = Cost per Unit × Number of Units
Now, let's calculate both:
- In-House: $350,000 + ($30 × 9,000) = $350,000 + $270,000 = $620,000
- Outsourced: $80 × 9,000 = $720,000
In this case, in-house production is cheaper by $100,000 compared to outsourcing.
The breakeven point occurs when the total cost of in-house production equals the total cost of outsourcing. To find the breakeven point in terms of units (X), we set up the equation:
$350,000 + $30X = $80X
Solving for X, we get:
X = $350,000 / ($80 - $30) = 7,000 units
Therefore, if the company needs to produce 7,000 units or fewer, it would be cheaper to outsource. If it needs to produce more than 7,000 units, in-house production is more cost-effective.
Given the customer requirement is for 9,000 units, the company should choose to produce the item in-house to minimize costs.