Question

A firm is evaluating the alternative of manufacturing a part that is currently being outsourced from a supplier. The relevant information is provided below:

For in-house manufacturing:

Annual fixed cost

=

$60,000

Variable cost per part

=

$100

For purchasing from supplier:

Purchase price per part

=

$180

1. Using this information, find the best decision if the demand is 6,500 parts. Round your answers to the nearest dollar.

   What is the total cost of production: $  
   what is the total cost of outsourcing: $  

   what is the best decision?

1. Determine the break-even quantity at which the firm would be indifferent between manufacturing the part in-house or outsourcing it. Round your answer to the nearest whole number.

Answer 1

Given are the details:

Annual fixed cost: $60,000

Variable cost per part: $100

Purchase price per part: $180

Demand: 6500 parts.

Using this information, find the best decision if the demand is 6,500 parts. Round your answers to the nearest dollar.

What is the total cost of production: $  

Cost of production is calculated as Fixed cost+ variable cost per part* demand for parts.

Using this formula, total cost of production is : $60,000+($100*6500)= $710000

total cost of production: $710000

what is the total cost of outsourcing: $

cost of outsourcing is calculated as purchase price per part* demand for parts.

Using this formula, cost of outsourcing is: $180* 6500= $1170000

Cost of outsourcing: $1170000

Decision: Cost of Production is $710000 and cost of outsourcing is $1170000. Cost of outsourcing is greater than cost of production. Therefore, best decision is to produce internally.

Determine the break-even quantity at which the firm would be indifferent between manufacturing the part in-house or outsourcing it. Round your answer to the nearest whole number.

Let the breakeven quantity be x.

The equation is fixed cost+ variable cost = price per part

using the above equation:

60000+100x = 180x

solving the equation, we get:

80x= 60000

x=60000/80

x=750.

Thus breakeven quantity is 750 units.