Question

Assignment

Star Company has been manufacturing 10,000 units of Part 13 per month.  At this level of production, the company’s costs (expressed on a per-unit basis) follow:

Variable cost................................................................................................... $20.00

Fixed cost........................................................................................................... 7.50

            Total cost per part............................................................................... $27.50

Star can outsource the manufacture of 10,000 units of Part 13 to Huron Company at a cost of $24 per unit to Star.  Star has determined that if it does outsource the part, it can rent for $5,000 per month the facilities it presently uses to produce Part 13.  Star also has determined that fixed costs can drop by one-third if it outsources Part 13 to Huron.

2.   Assume, for this part only, that Star is considering using the facilities for Part 13 to make   Product MR5 instead of renting the facilities out, if it does decide to outsource Part 13.  What is the minimum amount of profit that new product MR5 must generate to justify the decision for Star to outsource Part 13?

Answer 1

Answer 1:

We calculate below cost (per month) to 'Make' and cost to 'Buy'

Cost to buy (outsource) is higher at $285,000, it will be prudent for Start company to manufacture Part 13.

Answer 2:

Star is considering using the facilities for Part 13 to make Product MR5 instead of renting the facilities out, if it does decide to outsource Part 13.

The required minimum amount of profit per month that new product = $15,000

The calculations are as below: