Company A makes snowboards. The company is considering a new process for applyin

Question

Company A makes snowboards. The company is considering a new process for applying the finish to the board. Company A sells 160,000 snow boards per year. The company can use the new process at a fixed cost of $120,000 and variable cost of $0.90 per unit. Company B has offered to finish the boards for company A at a fixed cost of $170,000 and a variable cost $0.65 per unit. What is the annual total cost for company A to finish the boards themselves with the new process for the first year? What is the annual total cost for Company A to have company B finish the boards for the first year? Find the point of indifference How many boards would need to be sold in the first year to justify outsourcing the process to company B?

Explanation / Answer

(a) Annual total cost for Company A to finish boards for themselves is $264,000.

(b) Annual total cost for Company A to have company B finish the boards is $274,000.

(c) The point of indifference = Difference in fixed cost / Difference in variable cost

= 50,000/0.25 = 200,000 Units.

(d) Company to outsource and sold more than 200,000 boards to get more profit because outsource option is having less variable cost.

Company A Outsourcing to Company B Difference No. of snow boards sales per year 160000 160000 Variable cost per unit 0.90 0.65 0.25 Variable cost 144000 104000 Fixed cost 120000 170000 50000 Annual total cost 264000 274000

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