- Gabriela Manufacturing must decide whether to insource or outsource a new toxic-free miracle carpet cleaner that works with its Miracle Carpet Cleaning Machine. If it decides to insource the product, the process would incur $325,000 of annual fixed costs and $1.50 per unit of variable costs. If it is outsourced, a supplier has offered to make it for an annual fixed cost of $125,000 and a variable cost of $2.25 per unit in variable costs.
(a) Given these two alternatives, determine the indifference point (where total costs are equal).
(b) If the expected demand for the new miracle cleaner is 300,000 units, what would you recommend that Gabriela Manufacturing do? - Downhill Boards (DB), a producer of snowboards, is evaluating a new process for applying the finish to its snowboards. Durable Finish Company (DFC) has offered to apply the finish for $175,000 in fixed costs and a unit variable cost of $0.65. Downhill Boards currently incurs a fixed annual cost of $120,000 and has a variable cost of $0.90 per unit. Annual demand for the snowboards is 160,000.
(a) Calculate the annual cost of the current process used at Downhill Boards.
(b) Calculate the annual cost if Durable Finish Company applies the finish.
(c) Find the indifference point for these two alternatives.
(d) How much of a change in demand is needed to justify outsourcing the process?
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