Final answer:
Chris Co. should consider outsourcing production of their surfboards since the supplier's offer of $300 per unit is financially advantageous compared to the in-house cost of $305,000 for 1000 units, once fixed costs are factored in.
Step-by-step explanation:
When considering whether Chris Co. should outsource the production of surfboards, a quantitative analysis is crucial. The supplier has offered to make surfboards at $300 each, while the internal unit-level cost for Chris Co. is $280 per board. However, additional costs must be included in this decision such as the product design costs of $25,000 annually and facility-level costs of $50,000. By outsourcing, Chris Co. would avoid these internal production costs but would incur a higher per-unit cost from the supplier.
If producing 1000 surfboards annually, it appears initially cheaper to produce them in-house ($280 each) rather than outsourcing at $300 per unit. However, we must also consider the fixed costs. The product design and facility costs total $75,000 per year regardless of how many units are produced. When added to the in-house production costs, Chris Co. would face a total cost of $305,000 for making 1000 surfboards. Meanwhile, if outsourced, the cost would be $300,000 for the same quantity without incurring fixed costs.
Thus, outsourcing would be beneficial if the company intends to produce the current volume of surfboards, as it offers a slightly better cost-saving. Outsourcing might also provide Chris Co. with flexibility, allowing the company to allocate resources and capabilities to other areas of its business.