Final answer:
The company should compare the total in-house production costs to the supplier's offer to determine if it is more cost-effective to outsource production. This decision includes evaluating all variable and fixed costs, and considering strategic factors such as production control and supplier flexibility.
Step-by-step explanation:
The question revolves around a decision that a company must make regarding accepting an offer from a supplier to produce 10,000 units of an assembly part at $6 per unit. If the company accepts this offer, it would save on all variable costs but not on fixed costs.
To make an informed decision, the company should calculate the total cost of producing these parts in-house, including both fixed and variable costs, and compare it with the supplier's offer of $60,000 (10,000 units × $6 per unit). If the in-house production costs exceed $60,000, it would be more cost-effective to accept the supplier's offer, assuming the quality and delivery meet the company's requirements.
By comparing the fixed and variable costs, the firm can determine at what point outsourcing becomes more beneficial. Situations like this are common in cost-benefit analysis, a tool used by businesses to decide the best course of action. It is important to note that the decision may also be influenced by strategic considerations such as maintaining control over the production process, quality assurance, the flexibility of the supplier, and long-term contractual obligations.
Furthermore, if the variable cost per unit is higher than $6, then the firm would save on every unit produced by the supplier; however, if the variable cost per unit is lower than $6, the company will need to consider if the savings from outsourcing exceed the total fixed costs to determine if it is the right move financially.