Consider the following specific potential outsourcing situation:
ABC has determined it can manufacture the new valve product internally for $27,000 in fixed costs (FC) and $8 variable costs (VC) per unit. The company president has estimated ABC will sell 4,800 (unit volume = UV) of these valves each year. Jay Production, a small but highly reputable company specializing in outsourced mechanical manufacturing, has contacted ABC's president, and offered to manufacture this new valve for ABC for an annual fee of $29,000 plus $6 per unit.
Provide the algebraic equation for determining the total annual manufacturing cost (TC) of the valve (using TC, FC, VC, and UV as variables).
Calculate and provide the total annual manufacturing cost if the valve is manufactured by ABC.
Calculate and provide the total annual manufacturing cost if Jay manufactures the valve.
Indicate which is better from a total annual manufacturing cost standpoint.
Algebraic equation for manufacturing cost:
TC = FC + VC * UV
For given data (fixed cost, variable cost, total annual sell), this solution provides estimated total cost for two possible options and decided the better option of the two.