PLASTIC OR METAL OR SUBCONTRACT. Workplace, International is re-evaluating the design, cost and profitability of its line of office accessories. Currently, the items are constructed of metal-based parts for durable and consistent performance. At the time of the initial process decision, the metal drawing process was also the most economical. Management now suspects that the cost advantage enjoyed by metal parts is highly dependent on the volume of parts produced. To confirm their suspicions, management would like you to compare the break-even volume for one of its products, the 3-hole punch, when fabricated from metal versus plastic.
Metal Drawing Process Plastic Injection Molding
Fixed cost $ 50,000 $100,000
Variable cost $ 5 per unit $ 2 per unit
Selling price $10 per unit $10 per unit
a. What decision can be made based on the individual break-even points of each process?
b. Referring to the previous example, Workplace management wants more specific information regarding the volume at which the 3-hole punch should be constructed from metal parts or from plastic parts. Management is also considering subcontracting out the production of the parts for $8 per unit. Which alternative would you recommend?