Your company is launching a new product. Currently you have the capability to manufacture everything in your plant with the exception of one key component. As the plant manager, senior management is relying on you to determine if this component should be outsourced or manufactured in your plant. Below are the costs associated with each option:
To manufacture the product:
- Fixed costs would increase by $250,000
- The variable cost to manufacture this component is $20 each
To outsource the product:
- You have found a supplier that will sell you the component for $24 each
- The cost to ship the component from the supplier to your plant is $1 per piece
a. What recommendation would you make to senior management? (show the math)
b. Fully explain your rationale?