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 $280,000 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 $100,000 and a variable cost of $2.10 per unit in variable costs.(Round answers to the nearest whole dollar, e.g. 5,275.)

Given these two alternatives, determine the indifference point (where total costs are equal).

If the expected demand for the new miracle cleaner is 320,000 units, what would you recommend that Gabriela Manufacturing do?

is a cheaper alternative. The actual difference between the total costs of insourcing and outsourcing may be computed to be $

Indifference point

units

Explanation / Answer

The indifference point is the level of volume at which total costs, and hence profits, are the same under both cost structures

a) Cost Indifference Point = Differential fixed cost/Differential variable cost per unit

                                    = (280000-100000)/ (2.10-1.50)

                                    = 180000/0.60

                                    = 300000 Units

b)

therefore it is advisable to insource the 320000 units , since total cost is lower than the outsource total cost.

note

variable cost 480000 =320000*1.5

672000=320000*2.10.

units Fixed cost variable cost total cost Insource 320000 280000 480000 760000 outsourcing 320000 100000 672000 772000

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