Suppose that a manufacturer can produce a part for $9.00 with a fixed cost of $4

Question

Suppose that a manufacturer can produce a part for $9.00 with a fixed cost of $4,000. The manufacturer can contract with a supplier in Asia to purchase the part at a cost of $12.00, which includes transportation. a. If the anticipated production volume is 1,000 units, compute the total cost of manufacturing and the total cost of outsourcing. What is the best decision? b. Find the break-even volume and characterize the range of volumes for which it is more economical to produce or to outsource.

Explanation / Answer

Total cost of production=1000*9+4000 13000 Total cost of outsourcing=1000*12 12000 a>It is better to outsource as it is cheaper b>Let the indiffent point of the quantity=X so, 9X+4000=12X or 3X=4000 or X=4000/3 1333.333333 or Say 1334 So upto 1334 quantity it is good to outsource and beyond this quantity it is good to produce.

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