Question

Select one of the following decisions (special orders, short-run pricing, outsourcing, etc.). Provide a specific example for that decision that you might have to make as a manager of your own hypothetical company. What elements would you consider? What elements would be irrelevant? Why?

Answer 1

Outsourcing decision

Sometimes a situation comes that involves deciding whether to make own product or buy that product from outside market, this type of decision is known as Outsourcing Decision.

For Example

Company can manufacture a product by expending variable cost of $ 150 Per Unit and Avoidable fixed cost of 3 Per Unit and we can buy the same product at $ 148 from market. It’s better to buy from the market as cost will be less.

Variable cost                      $ 150 PU

Avoidable Fixed Cost      $ 3 PU

Total Cost                            $ 153 PU

Purchase Price                  $148 PU

Savings in Purchase        $ 5 PU                  

Variable cost and Avoidable cost will be considered as variable cost is the cost which will be saved if we do not produce the product by our self, Similarly Avoidable Fixed cost is the cost which can be avoided if Production is stopped.

Unavoidable fixed cost will be irrelevant and will not be considered for taking this decision because Unavoidable fixed cost will be incurred even if no production is done. Unavoidable fixed cost remains same at every level of output.