Question

E G H 1 Outsourcing Problem 2 3 OUTSOURCE Variable Cost $12.00 /unit Fixed Cost $0.00 MANUFACTURE Variable Cost $10.00 /unit Fixed Cost $5,000.00 4 5 6 7 8 1200 units Volume Cost of Manufacturing Cost of Outsourcing What is the best option? 9 10 11 12 13 14 15 16 17 18 19

Answer 1

Basic Points: Here we have to remember that fixed costs can not be avoidable even we stop manufacturing the product. For example Rent of Factory, even we are not produced one unit of product, we have to pay factory rent. So, here I am answering the question in two scenarios. 1. If Fixed Costs are not avoidable. 2. If Fixed Costs are Avodable with outsourcing. 1. If Fixed Costs are not Avoidable: Calculation of Cost of Manufacturing: Variable Cost (1200 x $10) Fixed Cost Total Cost of Manufacturing $ $ $ 12,000.00 5,000.00 17,000.00 14,400.00 $ $ Calculation of Cost of Outsourcing: Variable Cost (1200 x $12) Fixed Cost for outsourcing Fixed Cost incurred at Manufacturing facility UnAvoidable) Total Cost of Outsourcing $ $ 5,000.00 19,400.00

2. If Fixed Costs are Avoidable with Outsourcing: Calculation of Cost of Manufacturing: Variable Cost (1200 x $10) Fixed Cost Total Cost of Manufacturing $ $ 12,000.00 5,000.00 17,000.00 $ 14,400.00 Calculation of Cost of Outsourcing: Variable Cost (1200 x $12) Fixed Cost for outsourcing Fixed Cost incurred at Manufacturing facility Avoidable) Total Cost of Outsourcing $ $ 14,400.00 Best Option: Outsourcing is Best Option