Question

Wilson Co. produces sports equipment and is currently producing 2,000 tennis rackets annually. A supplier has offered to produce the rackets for Wilson Co. for $370 per racket. Wilson incurs unit-level costs of $360 per unit. Wilson also spends $10,000 on product design each year and incurs $100,000 of facility-level costs. Based on your quantitative analysis, should Wilson Co. outsource the rackets? What is the effect on profit?

Answer 1

Answer:

Yes, Wilson Company shall outsource the rackets.

Effect on profit is that the profit will increase by the net cost avoided = $830,000 - $740,000 = $90,000

Explanation:

As for the information provided:

We will do a comparative analysis, of current situation and that of the offer given by supplier.

Total current cost in case of manufacturing:

Cost of production = $360 $\times$ 2,000 = $720,000

Cost of product design = $10,000

Facility level cost = $100,000

These all cost are avoidable in case of buying from supplier. Thus, total avoidable cost = $830,000

Total cost associated in case of buying the sports equipment from supplier shall be: $370 $\times$ 2,000 = $740,000

Since, the cost in case of buying is less, the tennis rackets shall be bought from supplier.