Mark Berenson is CEO of Montclair Electronics. He is currently producing 100,000 video telephones a year in his New Jersey plant, where fixed costs amount to $1.5 million and the variable cost per unit is $4.
By outsourcing to a Mexican firm, they will be able to reduce the annual fixed cost to $1 million.
When the variable cost of outsourcing is $5 per unit, what is the break-even quantity in this case? Please provide the formula, at least one step of calculation, and the correct answer for full credit.
Should the company outsource? And why?