Unitized costs approach

1. Unitized Costs

Suppose you are a manager in a manufacturing company. Your accountant has just presented you with a very detailed cost analysis for a decision whether to outsource or make a component of a product. You have to use this analysis in a meeting with other managers. Since the analysis is shown in totals and your colleagues prefer simple reports and unit cost, you divide the bottom-line amounts by the total units to be made or bought (outsourced) and present just these in a simple report. Your colleagues are pleased that your report is so easy to understand and simple to use. Then they begin to predict the total cost difference for several other possible number of units to be made or outsourced by simply multiplying the unit costs by the volume to be outsourced. Why should you feel uncomfortable?

Solution Summary

Unitized costs approach to decision whether to outsource or make a component