6. Stassen Home Control Co – To outsource or not to outsource Stassen makes a va

Question

6.   Stassen Home Control Co – To outsource or not to outsource
Stassen makes a variety of sophisticated systems used in “smart home” automation and security. A key component is the Network Interface Box (NIB), which links the disparate subsystems together. Stassen’s competitive advantage lies in its special software, but the hardware used for the NIB is all COTS (commercial off the shelf). Because of this, the company is considering outsourcing production of the hardware, focusing its own efforts on the “secret sauce” software.
Currently, Stassen’s manufacturing operations incur a fixed cost of $20,000 per month and a variable cost of $150 per NIB. Flextronics, a leading outsourcing company, has offered to produce the boxes and supply them to Stassen for $200 each.
Perform a cost-volume analysis, similar to problem 3 and show your work. What advice would you give the purchasing manager?

Explanation / Answer

Let the number of units in consideration be "x"

costs in case of Stassen's manufacturing = fixed cost+total variable costs.

total variable costs = number of units*variable costs per unit

total costs: 20,000+150x

costs for flextronics = 200x

Both these costs will be equal when,

20,000+150x = 200x

20,000 = 50x

or x = 400 units. Thus at a monthly volume of 400 units costs in both cases are same.

if x<400, say 399: costs for Stassen's manufacturing = 20,000+150*399 = 79,850. cost for flextronics = 200*399 = 79,800

Thus, if NIB<400 units (on a monthly basis), flextronics should be used. If NIB>400 units on a monthly basis, Stassen should use its own manufacturing facility.

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