s Activity #1: Outsourcing Decisions outsourcing The fixed costs of in-house pro
ID: 2614719 • Letter: S
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s Activity #1: Outsourcing Decisions outsourcing The fixed costs of in-house production (FC) and the cost per unit produced (VC1) versus the cost per unit if outsourced determines the break-even point for deciding between the two. When the graph first loads, the parameter values represent a decision for which the fixed costs are $250,000 (the intercept of the blue in- house line is FC 2.5) and the cost per unit produced in-house is $20 (VC1 20 is the slope of the blue in- house line). The red line for outsourced production has an intercept of SO because there are no fixed costs its slope represents a unit price of $35 (VC2 35) The point at which the lines cross is the break-even point of 16,670 units. For quantities above the break-even point, in-house production is less expensive but for quantities below that point, outsourcing has the lower cost Drag vertically on the right-side of the to change the unit cost for either in-house or outsourcing production. The graph enforces that the unit cost of outsourcing is always greater than the unit cost of tn-house production. Drag on the left side to change the foxed cost for in-house production. Observe how the changes in the parameters affect the break-even point VC1-20.00 VC2-35.00 FC-2.50, 16.67 10 15 20 Quantity (1000s) Type here to searchExplanation / Answer
1. The answer is option “b”. Any decrease in out-sourcing unit cost will increase the breakeven point. For example let the outsourcing unit cost be $30 (decreased from $35). So new breakeven = 250,000/(30-20) = 25,000. Thus breakeven increases from 16,670 to 25,000 units.
2. Breakeven = 200,000/(30-10) = 200,000/20
= 10,000 units. The answer is option “b”.
3. New breakeven = 200,000/ (35-15) = 200,000/20 = 10,000
Thus the breakeven stays the same at 10,000. The answer is option “c”.
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