Assume that HVI currently purchases the chair cushions for its lawn set from an

Question

       Assume that HVI currently purchases the chair cushions for its lawn set from an outside company for $15 per set. HVI

HVI currently purchases the chair cushions for its lawn set from an outside company for $15 per set. HVI's chief operations officer wants an analysis of the comparative costs of manufacturing these cushions to determine whether bringing the manufacturing in-house would save the firm money. Additional information shows that if HVI were to manufacture the cushions, the materials cost would be $6 and the labor cost would be $4 per set and that it would have to purchase-cutting and sewing equipment, which would add $10,000 to annual fixed costs.

Explanation / Answer

The proper way to answer this would be by comparing through a relative cost approach. With that being said, we need to account for the fixed costs. This formula would be 15 =(10X+10000)/(X) ... This formula basically shows that in order to create these cushions in house and achieve a price at or below $15 per set, you would need to manufacture at least 2000 cushions. Keep in mind that the costs per set WILL never drop below $10 because of your variable costs, aside from the fixed cost.

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