Question

A global manufacturer of electrical switching equipment (ESE) is considering outsourcing the manufacturing of an electrical breaker used in the manufacturing of switch boards. The company estimates that the annual fixed cost of manufacturing the part in-house, which includes equipment, maintenance, and management, amounts to $10 million. The variable cost of labor and materials are $13.00 per breaker. The company has an offer from a major subcontractor to produce the part for $20.00 per breaker. a. How many breakers would the electrical switching equipment company need per year to make the in-house option the least costly? The company should consume breakers per year to make the manufacturing the part in-house option the least costly. (Enter your response rounded to the nearest whole number.) b. Assume the subcontractor wants the company to share in the costs of the equipment. The ESE company estimates that the total cost would be $5 million, which also includes management oversight for the new supply contract. For this concession, the subcontractor will drop the per unit price to $14.00. Under this assumption, how many breakers would the ESE company need per year to make the in-house option least costly? The company should consume breakers per year to make the manufacturing the part in-house option the least costly. (Enter your response rounded to the nearest whole number.) c. If the ESE manufacturer is expecting to use 700,000 breakers per year, which option (make in-house, use subcontractor without sharing in the cost of equipment, use subcontractor with sharing in the cost of equipment) is the least costly? with a total cost of The least costly option is (Enter your response rounded to the nearest whole number.)

Answer 1

a.

Let assume, at X unit there will be point of indifference.

At X unit -

Total Cost of In house option = 10000000 + 13X

Total Cost of Subcontract option = 20X

At point of Indifference,

Total Cost of In house option = Total Cost of Subcontract option

10000000 + 13X = 20X

7X = 10000000

X = 1428571.43

Hence,

Subcontract option will be least costly upto 1428571 units

In house option will be least costly at 1428572 and above units.

b.

Let assume, at X unit there will be point of indifference.

At X unit -

Total Cost of In house option = 10000000 + 13X

Total Cost of Subcontract option = 5000000 + 14X

At point of Indifference,

Total Cost of In house option = Total Cost of Subcontract option

10000000 + 13X = 5000000 + 14X

X = 5000000

Hence,

Subcontract option will be least costly upto 5000000 units

In house option will be least costly at 5000000 and above units.

c.

At 700000 units -

Total Cost of In house option = 10000000 + 13*700000 = 19100000

Total Cost of Subcontract option without sharing cost = 20*700000 = 14000000

Total Cost of Subcontract option with sharing cost = 5000000 + 14*700000 = 14800000

Hence, from above, we can conclude that Subcontract option without sharing cost of equipment will be least cost option with a total cost of 14000000.