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Make or Buy (Outsource) Decision Problem has come to your attention as a New Hir

ID: 470912 • Letter: M

Question

Make or Buy (Outsource) Decision Problem has come to your attention as a New Hire with a Cell Phone producing Firm. Following details are provided to you so that you can make appropriate recommendation.

DECISION

Fixed Cost in million

Per Unit Variable Cost

Make

$      15.00

$             50.00

Outsource

$       1.50

$             70.00

Annual Demand

400,000

Cell Phones

  

In a High Level meeting everybody agreed that the Firm will definitely save about $13.5 million (15-1.5) in Fixed Cost if they outsource Cell Phone Deal, but you have requested additional time to analyze and recommend appropriate action. Based on your analysis, your recommendations is:

Make or Outsource has the same Outcome

Everybody is Outsourcing so Outsource

Make - Don

      

DECISION

  
     

Fixed Cost in million

  
     

Per Unit Variable Cost

  
     

Make

  
     

$      15.00

  
     

$             50.00

  
     

Outsource

  
     

$       1.50

  
     

$             70.00

  
     

Annual Demand

  
     

400,000

  
     

Cell Phones

  
  

Explanation / Answer

Cost of Making Cell Phones = 400000 x 50 + 15 millions = 20+15 = 35 million

Cost of out sourcing Phones = 400000 x 70 + 1.5 million = 28+1.5 = 29.5 millions.

Hence, Net Saving on Outsourcing = 35 - 29.5 = $5.5millions

Hence, Option d is correct

Outsource

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