Question

Randle aviation manufactures high-end airliners for top-tier celebrities. During the previous year, Randle produced a total of 100 airliner. Each of these airliners requires a complicated computer system that Randle is considering outsourcing. Currently, for the 100 computer units produced during the year, a total of $6,500,000 were incurred for product costs, of which $3,000,000 were fixed. The remaining product costs were variable

If the computer is outsourced, fixed manufacturing overhead will decrease by 5%, and the freed-up space in the warehouse can be used to produce another part that is high demand. By producing the part in high demand, Randle will produce $500,000 in additional operating income.
Assuming Randle will need 110 computer units next year, at what purchase price per unit will the company be economically indifferent between making the part and outsourcing the part?
OA. $41,500.00
OB. $36,363.64
O C. $40,909 09
OD. $39,545.45
OE. None of the above options are correct

Answer 1

To find the break-even purchase price for outsourcing computer units, Randle Aviation's total cost after a 5% reduction in fixed costs and additional operating income should be calculated and divided by the number of units needed. The calculated price per unit is $56,363.64 which isn't an option provided in the question, indicating that the correct answer is 'None of the above'.

Step-by-step explanation:

To determine the purchase price per unit at which Randle Aviation would be economically indifferent to making or outsourcing the computer systems, we need to compare the total costs for both scenarios and set them equal to each other.

The current total product cost for making 100 units is $6,500,000, with fixed costs making up $3,000,000 of that amount. If the fixed cost is reduced by 5%, the new fixed cost would be $3,000,000 - ($3,000,000 * 0.05) = $2,850,000. Since the remaining costs are variable, we can calculate the variable cost per unit as ($6,500,000 - $3,000,000) / 100 = $35,000 per computer unit.

If Randle Aviation makes 110 units next year, the total cost to make them would be ($2,850,000 fixed costs + $35,000 variable cost/unit * 110 units) = $6,700,000. However, we must also take into account the additional $500,000 in operating income that could be generated from using the freed-up space. Therefore, the net cost of making the computers in-house would be $6,700,000 - $500,000 = $6,200,000.

To find the break-even purchase price per unit when outsourcing, this total cost of $6,200,000 should be divided by the 110 units needed, giving us a break-even price of $6,200,000 / 110 = $56,363.64 per unit. This number is not an option given in the question, making the correct answer None of the above.

Answer 2

Randle Aviation would be economically indifferent between making and outsourcing the computer systems if the purchase price per outsourced unit is $40,909.09. This price is determined by equating the internal production costs with the costs and benefits of outsourcing, considering the decrease in fixed costs and the additional income from using the free space.

Step-by-step explanation:

To determine the purchase price per unit at which Randle Aviation would be economically indifferent between making the computer systems and outsourcing them, we need to consider two scenarios: the costs of making the units internally, and the costs and benefits of outsourcing.

Currently, Randle's total product costs for 100 units are $6,500,000 with $3,000,000 being fixed. This means the variable cost is $3,500,000 ($6,500,000 - $3,000,000). The variable cost per unit, therefore, is $35,000 ($3,500,000 / 100).

If Randle outsources the computer systems, the fixed costs decrease by 5%. So, we calculate the new fixed costs: $3,000,000 - (5% of $3,000,000) = $3,000,000 - $150,000 = $2,850,000. However, by using the freed-up space to produce another part in high demand, Randle can generate an additional $500,000 in operating income.

To find the indifference point, we need to equate the two scenarios. For next year, Randle predicts needing 110 computer systems. The cost to make them internally would be the sum of the variable costs for 110 units plus the fixed costs: (110 units * $35,000) + $3,000,000. In the outsourcing scenario, the cost savings and additional income must offset the cost to purchase the units.

Let P be the purchase price per unit for outsourcing. The total outsourcing costs would be 110P (for the units) plus the new fixed costs ($2,850,000), minus the additional income ($500,000). The equation to find the indifference purchase price P is as follows:

(110 units * $35,000) + $3,000,000 = 110P + $2,850,000 - $500,000

Solving the equation: 110P = [(110 * $35,000) + $3,000,000] - [$2,850,000 - $500,000]

110P = $3,850,000 + $3,000,000 - $2,350,000

110P = $4,500,000

P = $4,500,000 / 110

P = $40,909.09

Therefore, Randle Aviation would be economically indifferent between making and outsourcing the computer systems if the outsourcing price per unit is $40,909.09.