Assume that a manufacturer can produce part for $9.00 with fixed cost of $4,000. The manufacturer can contract with supplier in Asia to buy the part at the cost of $12.00, which comprises transportation.
a. If the anticipated production volume is 1,000 units, calculate the total cost of manufacturing and the total cost of outsourcing. What is the best decision?
b. Find the break-even volume and characterize the range of volumes for which it is more economical to produce or to outsource.