Question

A hardware store currently outsources the cutting of wood sheets, and are considering cutting in-house to save money. Their cutting orders amount to 12,000 units. Using the following information, should they outsource or continue to cut the wood in-house? If done in-house, the fixed cost for new machinery is $380,000 while the variable cost would be $12 per unit. Alternatively, they can outsource the full quantity of 12,000 units for a total of $500,000.

Should they cut in-house or outsource?

Answer 1

Based on the provided costs, it is more cost-effective for the hardware store to outsource the cutting of wood sheets since the total cost of outsourcing ($500,000) is less than the total cost of cutting in-house ($524,000).

Step-by-step explanation:

To decide whether the hardware store should cut wood in-house or outsource, we need to compare the total costs of both options. If the store decides to cut the wood in-house, the total cost will be the sum of the fixed costs for new machinery and the variable costs per unit. The fixed cost is $380,000 and the variable cost per unit is $12. Hence, for 12,000 units, the variable cost would be 12,000 units * $12/unit = $144,000. Adding the fixed costs, the in-house total cost would be $380,000 + $144,000 = $524,000.

On the other hand, if the store decides to outsource, the total cost is given as $500,000 for the full quantity of 12,000 units. Comparing both total costs, outsourcing the cutting ($500,000) is less expensive than cutting in-house ($524,000).

Therefore, based on this analysis, it is more cost-effective for the hardware store to outsource the cutting of wood sheets.