Question

3. Suppose that a firm can produce a part it uses for $875 per unit, with a fixed cost of $75,000. The company has been offered a contract from a supplier that allows it to purchase the part at a cost of $920 per unit, which includes transportation. (a) If the anticipated production volume is 1500 units of the part, compute the total cost of manufacturing and the total cost of outsourcing. (b) What is the best decision

Answer 1

Answer: for manufacturing total cost is $1387500

For outsourcing total cost is $1380000

It is wiser for the company to outsource and save $7500

Step-by-step explanation:

Cost for manufacturing 1500 units at $875 per unit is 1500x875

= $1312500

Fixed cost of production is $75000

Total production cost becomes,

1312500 + 75000 = $1387500

Cost for outsourcing;

1500 units at $929 will cost

1500x920 = 1380000