Question

A firm is evaluating the alternative of manufacturing a part that is currently being outsourced from a supplier. The relevant information is as follows:
For in-house manufacturing:
Annual fixed cost = $100,000
Variable cost per part = $140
For purchasing from supplier:
Purchase price per part = $160
a. Using this information, find the best decision if the demand is 4,000.
b. Determine the break-even quantity for which the firm would be indifferent between manufacturing the part in-house or outsourcing it.  

Answer 1

a) for the demand of 4000,

In house manufacturing cost = fixed cost + variable cost* (demand) = $100,000 + $140*4000 = $660,000

Total Out-sourcing cost = Per unit price * $160 * 4000 = $640,000

Since outsourcing cost is less, therefore in this case outsourcing is better

b) Let Q be the quantity

For the firm to be indifferent,

Manufacturing cost = outsourcing cost

=> fixed cost + variable cost* (demand) = Perunit price * demand

=> $100,000 + $140*Q = $160 * Q

=> $100,000 = $160* Q - $140*Q

=>$20 * Q = $100,000

=> Q= 5000

Therefore, the company will be indifferent if quantity is 5000