ABC Company, a producer of snow boards, is evaluating a new process for applying
ID: 463685 • Letter: A
Question
ABC Company, a producer of snow boards, is evaluating a new process for applying the nish to its snow boards. DEF Company has offered to apply the nish for $170,000 in xed costs and a unit variable cost of $0.65. ABC Company currently incurs a xed annual cost of $125,000 and has a variable cost of $0.90 per unit. Annual demand for the snow boards is 160,000. (a) Calculate the annual cost of the current process used at Downhill Boards. (b) Calculate the annual cost if Durable Finish Company applies the nish. (c) Find the indifference point for these two alternatives. (d) How much of a change in demand is needed to justify outsourcing the process?
Explanation / Answer
A) Annual cost of current process = $ 125000 ( Fixed cost) + 160000 ( Annnual demand) *$ 0.90 ( variable cost) =$ 269000
B) Annual cost after applying finish = $170000 ( fixed cost ) + 160000 (Annual Demand) + $0.65 ( Variable cost) = $274000
C) the indifference point is nothing but demand that matches both current and cost after finish.
it can be calculated as follows
$ 125000 ( Fixed cost) + X ( Annnual demand) *$ 0.90 ( variable cost) = $170000 ( fixed cost ) + X (Annual Demand) + $0.65 ( Variable cost)
0.25X= $ 45000
X= 180000 .
D ) When there is demand of 180000 annually , there wont be any difference in costs.
When there is quanity more than 180000 , then there is requirement of outsourcing as
So the current demand should grow by 180000 -160000 = 20000 units to justify the need of outsourcing the process.