Question

Chris Co. produces sports equipment and is currently producing 1,000 surfboards annually. A supplier has offered to produce the boards for Chris Co. for $300 per board. Chris Co. incurs unit-level costs of $280 per unit. Chris also spends $25,000 on product design each year and incurs $50,000 of facility-level costs. If Chris Co. outsources the boards, they can lease their manufacturing space for $1,000. Based on your quantitative analysis, should Chris Co. outsource the board? What is the effect on profit?

Answer 1

To determine whether Chris Co. should outsource the surfboards, we need to compare the costs of producing in-house versus outsourcing. By calculating the profit for each option, we can identify which one is more profitable.

Step-by-step explanation:

To determine whether Chris Co. should outsource the surfboards, we need to compare the costs of producing in-house versus outsourcing. The unit-level cost for Chris Co. is $280 per board, while the supplier charges $300 per board. In addition, Chris Co. incurs $75,000 ($25,000 product design + $50,000 facility-level costs) in fixed costs per year. If Chris Co. outsources the boards, they can save $1,000 by leasing their manufacturing space.

To calculate the effect on profit, we need to subtract the costs of production (unit-level costs + fixed costs) from the revenue generated by selling the surfboards. Let's assume Chris Co. sells each surfboard for $500.

Profit = (Revenue - Costs)

For in-house production: Profit = (1000 * $500) - [(1000 * $280) + $75,000]

For outsourcing: Profit = (1000 * $500) - [(1000 * $300) + $75,000 - $1,000]

Compare the profit from in-house production with the profit from outsourcing to determine which option is more profitable.