The supply manager at a dishwasher manufacturer is assessing the company should

Question

The supply manager at a dishwasher manufacturer is assessing the company should purchase the pump from a supplier or assemble the pump in-house. Forecasts suggest that 15,000 pumps are needed per year. The annual fixed costs to assemble the pumps are $120,000 per year. The variable costs per unit to assemble the pump are $25/unit. The pumps can be purchased for $30/unit.

a. Compute the total annual cost for insourcing and outsourcing the pumps.

b. Which option would you prefer?

Explanation / Answer

Solution :

A : Total Cost for insourcing : Fixed + Variable Cost = 120,000 + 15000*25 = 495,000

Total Cost for outsourcing : 15000*25 = 450,000

B : Better option is Outsourcing

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