Final answer:
Chris Co. should outsource the surfboard production because it will lead to cost savings and increase their profit by $56,000 based on the quantitative analysis comparing in-house production costs and outsourcing costs (Option d).
Step-by-step explanation:
To determine whether Chris Co. should outsource the production of surfboards, a quantitative analysis of the costs involved should be conducted. Let's break down the costs to compare in-house production versus outsourcing.
- In-house production per unit: $280
- Annual design costs: $25,000
- Facility-level costs: $50,000
- Potential lease revenue if outsourced: $1,000
- Cost of outsourcing per unit: $300
If produced in-house, the total cost for 1,000 surfboards is the sum of the unit-level costs, design costs, and facility-level costs:
Total in-house production costs = (1,000 units * $280/unit) + $25,000 + $50,000
= $280,000 + $75,000
= $355,000
If outsourced, Chris Co. will save the unit-level costs but will incur the outsourcing cost and lose design and facility-level costs (which are sunk costs and won't be recovered). They will gain an extra $1,000 from leasing the space. The total cost of outsourcing is:
Total outsourcing costs = (1,000 units * $300/unit) - $1,000
= $300,000 - $1,000
= $299,000
Comparing the total in-house production costs to the total outsourcing costs, Chris Co. can save:
Total savings from outsourcing = $355,000 - $299,000 = $56,000
Therefore, Chris Co. should outsource the production of surfboards because it will increase the profit by $56,000. Hence, d is the correct option.