Question

p Marine International manufactures an aquarium pump and is trying to decide whether to produce the filter system in-house or sign an outsourcing contract with Bayfront Manufacturing to make the filter system. Marine’s expertise is producing the pumps themselves but they are considering producing the filter systems also. To establish a filter system production area at Marine International, the fixed cost is $300,000 per year and the company estimates their variable cost of production in-house at $12.25 per filter system. If Marine outsources the production of the filter system to Bayfront, Bayfront will charge Marine $30 per filter system. Should Marine International outsource the production of the filter system to Bayfront if Marine sells 25,000 pumps a year?

Answer 1

Answer:

Cost of in house production at 25000 units= $606250

Cost of outsourcing option at 25000 units= $750000

Thus, Marine international should produce the filter in house at a demand level of 25000 filters as the cost of in house production ($606250) is less than that of the outsourcing option ($750000).

Explanation:

To decide whether to outsource or not will depend on the total cost of each option incurred under certain production or demand level. The option providing the lowest total cost at that level will be chosen.

We first need to determine the cost of each option and see where the total cost for each item equates.

Cost of in house production = 300000 + 12.25x

Where, x is the number of units.

Cost of in house production = 300000 + 12.25 (25000)

Cost of in house production = $606250

Cost of outsourcing option = 30x

Cost of outsourcing option = 30 (25000)

Cost of outsourcing option = $750000

Thus, Marine international should produce the filter in house at a demand level of 25000 filters as the cost of in house production ($606250) is less than that of the outsourcing option ($750000).