Question: Suppose that a manufacturer can produce a part for $10.00 with a fixed cost of $5,000. The manufacturer can contract with a supplier in Asia to purchase the part at a cost of $12.00, which includes transportation.
1. If the anticipated production volume is 1.200 units, compute the total cost of manufacturing and the total cost of outsourcing. What is the best decision?
2. Find the break-even volume and characterize the range of volumes for which it is more economical to produce or to outsource.