Question

A company has the opportunity to outsource production of a part used in operations. The vendor has offered to sell them 3,500 units at $20/unit. To produce 3,500 units of the product, the following costs are incurred: Variable cost per unit $18.00/unit Fixed manufacturing overhead $13.50/unit Fixed selling & administrative $2.00/unit If the company outsources, all fixed S&A and $4.00 of fixed manufacturing overhead is avoidable. From a quantitative standpoint, should the company continue making the product or outsource, and how much would they save with their choice, assuming they need 3,500 units?

a Make; $14,000

b Outsource; $14,000

c Make; $40,250

d Outsource; $40,250

Answer 1

Answer: the correct answer is b Outsource; $14,000.

Step-by-step explanation:

To determine whether the company should make or outsource the product and how much they would save with their choice, we need to calculate the total cost for both options and compare them.

Making the product:

Variable cost per unit = $18.00/unit

Fixed manufacturing overhead (avoidable) = $4.00/unit

Fixed selling & administrative (avoidable) = $2.00/unit

Total cost per unit = Variable cost + Avoidable fixed manufacturing overhead + Avoidable fixed selling & administrative

Total cost per unit = $18.00 + $4.00 + $2.00 = $24.00/unit

Total cost for 3,500 units = Total cost per unit * Number of units

Total cost for 3,500 units = $24.00 * 3,500 = $84,000

Outsourcing the product:

Cost per unit from the vendor = $20.00/unit

Total cost for 3,500 units = Cost per unit from the vendor * Number of units

Total cost for 3,500 units = $20.00 * 3,500 = $70,000

Now, we compare the total costs:

If the company makes the product, the total cost will be $84,000.

If the company outsources the product, the total cost will be $70,000.

From a quantitative standpoint, the company should outsource the production of the product, as it will save $84,000 - $70,000 = $14,000 with their choice.

Therefore, the correct answer is b Outsource; $14,000.