Downhill Boards (DB), a producer of snow boards, is evaluating a new process for

Question

Downhill Boards (DB), a producer of snow boards, is evaluating a new process for applying the finish to its snow boards. Downhill Boards currently 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. Fast Finish, Inc. (FFI) has made a technological breakthrough in snow board finish application. FFI will apply the finish for $0.23 per unit in variable costs plus a fixed annual cost of $230,000. What will it cost Downhill Boards to outsource the finishing process? Total Cost from FFI = $. $ lowerhigher than insourcing. At what demand level does it make sense economically to outsource the finishing process? Better to outsource when demand is or more.

Explanation / Answer

insourcing cost = 125000 + 0.9*160000 = 269000 outsourcing cost = 230000+ 0.23*160000= 266800 insourcing is 2200 higher than outsourcing 125000 + 0.9x = 230000+ 0.23x x = 156716.42----above this demand level it is better to outsource

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