Gabriela Manufacturing must decide whether to insource or outsource a new toxic-

Question

Gabriela Manufacturing must decide whether to insource or outsource a new toxic-free miracle 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. If it is outsourced, a supplier has offered to make it for an annual fixed cost of $200,000 and a variable cost of $1.80 per unit in variable costs. If the expected demand for the new miracle cleaner is 300,000 units, what would you recommend that Gabriela Manufacturing do? OutsourcingInsourcing is a cheaper alternative. The actual difference between the total costs of insourcing and outsourcing may be computed to be $.

Explanation / Answer

insourcing cost = 300000 + 1.5*300000 = 750000 outsourcing cost = 200000+ 1.8*300000 = 740000 outsourcing is cheaper difference = 10000

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