Question

Suppose that a manufacturer can produce a part for $10.00 with a fixed cost of $5,000. The manufacturer can contract with a supplier in Asia to purchase the part at a cost of $12.00, which includes transportation.

a. If the anticipated production volume is 1,200 units, compute the total cost of manufacturing and the total cost of outsourcing. What is the best decision?
b. Find the break-even volume and characterize the range of volumes for which it is more economical to produce or to outsource.

Answer 1

To compute the total cost of manufacturing and outsourcing at a production volume of 1,200 units and find the break-even volume, we use the given costs and equations. It is more cost-effective to manufacture in-house rather than outsource. The break-even volume is 2500 units.

Step-by-step explanation:

To compute the total cost of manufacturing at a production volume of 1,200 units, we calculate the variable cost per unit by subtracting the fixed cost from the total cost. In this case, the variable cost per unit is $10 ($12 - $2). The total cost of manufacturing is then the variable cost per unit multiplied by the production volume, which is $12,000. The total cost of outsourcing is simply the cost per unit multiplied by the production volume, which equals $14,400. Comparing the two costs, it is more cost-effective to manufacture the part in-house rather than outsourcing.

To find the break-even volume, we need to determine the point where the total cost of manufacturing is equal to the total cost of outsourcing. Setting the two costs equal to each other and solving for the production volume, we get:

10x + 5000 = 12x

5000 = 2x

x = 2500

Therefore, the break-even volume is 2500 units. For production volumes below 2500 units, it is more economical to outsource. For production volumes above 2500 units, it is more economical to manufacture in-house.