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Outsourcing Cost Per Unit

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ABC's production line of the Widget gadget has a fixed cost of $200,000 and the variable cost is $5.00 per unit.

A. If the company sells the first 10,000 units at a price of $20 and then sells all additional units at $15 per unit, what is the break-even point?

B. Suppose that the company is considering outsourcing this to DEF company. If so, it will save the fixed and variable costs per unit. If the cost of outsourcing is $13 per unit, over what range would each of the production options (in-house and outsourcing) be preferred? Assume that the price per unit will remain the same whether it produces the product internally or outsources it.

C. Suppose that the company has determined that its demand is going to be 10,000 units. What is the outsourcing cost per unit that makes the two production alternatives equal to each other? Assume that the price per unit will remain the same whether it produces the product internally or out sources it.

D. Johndoe Company is interested in buying the Widget gadget from ABC. Johndoe Company is open to letting ABC manufacture them in-house or outsource them under certain conditions. Johndoe will only buy the outsourced if ABC reduces the selling price to $18 per unit. Also, if ABC does outsource this, Johndoe will only buy 8,000 units. On the other hand, if ABC produces the product internally, Johndoe will be willing to pay $20 per unit for all the products and Johndoe will buy 12,000 widgits. Economically, which option (produce internally or outsource) is better for ABC?

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Solution Summary

The outsourcing costs per unit are examined. The products for internal sources are determined.

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ABC's production line of the Widget gadget has a fixed cost of $200,000 and the variable cost is $5.00 per unit.

A.

Assume the company sells x units.
When x=10000, cost is: 200000+5*10000=250000
Profit: 20*100000=20000.
Therefore, we need to sell more than 10000 to obtain the break-even point.
200000+5x=20*10000+15*(x-10000)
X=15000.

B. ...

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