3. Downhill Boards (DB), a producer of snow boards, is evaluating a new process
ID: 363107 • Letter: 3
Question
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) has 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 finish. (c) Find the indifference point for these two alternatives. (d) How much of a change in demand is needed to justify outsourcing the process? 4. Fast Finish, Inc. (FFI) has made a technological break- through in snow board finish application. FFI will ap- ply the finish for $0.23 per unit in variable costs plus a fixed annual cost of $230,000. Use the cost and demand information given in Problem 3 for Downhill Boards to evaluate this proposal. (a) What will it cost Downhill Boards to outsource the finishing process? (b) At what demand level does it make sense economically to outsource the finishing process? (C) What additional factors should be considered when making this outsourcing decision?Explanation / Answer
3. Total Cost = Fixed Cost + Variable Cost * Number of Units
Annual Demand of Boards =160,000
Downhill Annual Cost = $ (125,000+ 0.90*160,000) = $ 269000
Annual cost if Durable Finish Applies the finish = $ (170,000+ 0.65*160,000) = $ 274000
Now the difference in the Price Point = $ 274000- $ 269000 = $ 5000
In this case although the variable cost is lesser than in house cost, but Fixed cost is quite higher therefore at the given level of demand outsourcing is bit risky proposition
Outsourcing makes sense when Outsource cost is lesser than Inhouse cost for the same number hence, Let the Annual Demand be D
=> 170,000+ 0.65*D <= 125,000+ 0.90*D
=>45000<=.25*D
=> D>=45000*4 = 180000
Change in demand = 180000-160000=20000
When the annual demand is more than 180,000 then go for outsourcing
4. Considering first Finish Inc. the outsource cost will come for downhill as below
Total Cot = $ (230,000+ 0.23*160,000) = $ 266800
Going with same Logic mentioned in above question,
=> 170,000+ 0.65*D <= 230,000+ 0.23*D
=>60000>=.43*D
=> D>= 139535
So if the demand is fluctuating and not sure of the right number then it’s better for downhill to do the finishing job inhouse rather outsourcing
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