Saved Awree NatCacnotus Inc, an innovative company located somewhere on the beautiful winding slopes of Pacific Northwest (a great place for hiking), produces and sales a single product, Metadite, an organic cream used for a variety of home first and uses. Established earlier this year, the company expects to produce and sell 70,000 tubes of Metadite. The following information is available regarding the pricing and cost structure of the product (and the company):
Selling price per tube $17.00
Direct material cost per tube 5.25
Direct labor cost per tube 2.75
Variable overhead cost per tube 0.75
Variable selling costs per tube 0.20
Total fixed costs for the year 220,000
Due to economic conditions in the political and labor market, the company is considering outsourcing production of Metadite to an overseas manufacturer. The manufacturer has quoted a product cost of $12.00 per unit plus a royalty commission of 10% of Awree's selling price (this refers to Awree's $17 selling price) for each until sold. The total fixed costs of Awree Natcacnotus will decrease by $170,000 if the outsourcing option is chosen.
a. At what level of sales will before-tax profits be the same if Awree Natcacnotus continues to produce internally or outsourcing production to an overseas manufacture?
b. At the expected sales of 70,000 units per year, which option is better - produce internally or outsourcing? Why?
c. Other than the calculations you made for part(b) above, what considerations might the company want to make before deciding to outsource? (PLEASE SHOW ALL YOUR WORK)