Question

Large global automobile manufacturer is considering outsourcing the manufacturing of a solenoid used in the transmission of its SUVs. The company estimates that annual fixed costs of manufacturing the part​ in-house, which include​ equipment, maintenance, and​ management, amounts to ​$7.1 million. The variable costs of labor and material are ​$8.00 per unit. The company has an offer from a major subcontractor to produce the part for ​$10.75 per unit.​ However, the subcontractor wants the company to share in the costs of the equipment. The automobile company estimates that the total cost would be $ 3.7 ​million, which also includes management oversight for the new supply contact.

A. How many solenoids would the automobile company need per year to make the​ in-house option least​ costly?
B. What other​ factors, besides​ costs, should the automobile company consider before revising its supply chain for​ SUVs?

Answer 1

A. Number of solenoids to make in-house to cover fixed costs:

Break-even Point = Fixed Cost/Contribution margin per unit

= $7,100,000/$2.75 = 2,581,818 Units

B. Other Factors, besides costs, to consider before revising its supply chain for SUVs, are the suppliers' capacity to meet demand, the quality of the outsourced part, competitors behavior, level of control which can be exercised over the supplier, etc.

Step-by-step explanation:

a) Market price per unit = $10.75

Variable cost per unit = $8.00

Contribution margin per unit = $2.75

b) Fixed Cost = $7.1 million