Question

Premier Co. produces park equipment and is currently producing 10,000 park benches annually. A supplier has offered to produce the benches for Premier Co. for $500 per bench. Premier Co. incurs unit-level costs of $490 per unit. Premier also spends $50,000 on product design each year and incurs $100,000 of facility-level costs. Based on your quantitative analysis, should Premier Co. outsource the benches?

Answer 1

Premier Co. should outsource the production of park benches because it would save them approximately $40,000 compared to in-house production.

Step-by-step explanation:

To determine whether Premier Co. should outsource the production of park benches, we need to compare the costs of producing the benches in-house versus outsourcing them to a supplier. Premier Co. currently produces 10,000 park benches annually at a unit-level cost of $490. If the supplier offers to produce the benches for $500 per bench, we need to calculate the total cost of outsourcing. The total cost of outsourcing is the annual production quantity (10,000 benches) multiplied by the outsourcing cost per bench ($500), which equals $5,000,000.

In addition to the unit-level costs, Premier Co. incurs product design costs of $50,000 per year and facility-level costs of $100,000. These costs are not incurred when outsourcing. Therefore, the total cost of in-house production is the sum of the unit-level costs, product design costs, and facility-level costs. The total cost of in-house production is $490 per bench (unit-level cost) multiplied by the annual production quantity (10,000 benches), plus $50,000 (product design costs), plus $100,000 (facility-level costs), which equals $5,040,000.

Comparing the total cost of outsourcing ($5,000,000) to the total cost of in-house production ($5,040,000), we can see that outsourcing the park benches would save Premier Co. approximately $40,000 ($5,040,000 - $5,000,000). Therefore, based on the quantitative analysis, Premier Co. should outsource the production of park benches.