1. Gabriela Manufacturing must decide whether to in source or carpet cleaner tha
ID: 363003 • Letter: 1
Question
1. Gabriela Manufacturing must decide whether to in source or carpet cleaner that works with its Miracle Carpet Cleaning Machine. If it decides to insource the product, the process would incur $300,000 of annual fixed costs and $1.50 per unit of variable costs. Ifit is outsourced, a supplier has offered to make it for an annual fixed cost of $120,000 outsource a new toxic-free miracle and a variable cost of $2.25 per unit in variable costs. (a) Given these two alternatives, determine the indifference point (where total costs are equal) (b) Ifthe expected demand for the new miracle cleaner is 300,000 units, what would you recommend that Gabriela Manufacturing do? 2. Gabriela Manufacturing was able to find a new sup- plier that would provide the item for $1.80 per unit with an annual fixed cost of $200,000. Should Gabriela Manufacturing insource or outsource the item? 3. Downhill Boards (DB), a producer of snow boards, is evaluating a new process for applying the finish to its snow boards. Durable Finish Company (DFC) ha:s offered to apply the finish for $170,000 in fixed costs and a unit variable cost of $0.65. Downhill Boards cur rently incurs a fixed annual cost of $125,000 and has a variable cost of $0.90 per unit. Annual demand for the snow boards is 160,000. (a) Calculate the annual cost of the current process used at Downhill Boards. (b) Calculate the annual cost if Durable Finish Company applies the finishExplanation / Answer
1) Total cost = Fixed cost + Quantity*variable cost
a) At indifference point, total cost for both alternatives are equal. let at x units, cost are same
300,000 + 1.5*x = 120,000 + 2.25*x
180,000 = 0.75*x
x = 240,000
b) At x = 300,000
Cost of insource = 300,000 + 1.5*300,000 = 750,000
Cost of outsource = 120,000 + 2.25*300,000 = 795,000
So, it is best to insource
2) At x = 300,000
Cost of new supplier = 200,000 + 1.8*300,000 = 740,000
So, it is better to outsource to new supplier
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.