Company A makes snowboards The company is considering a new

Company A makes snowboards. The company is considering a new process for applying the finish to the board. Company A sells 160,000 snow boards per year. The company can use the new process at a fixed cost of $120,000 and variable cost of $0.90 per unit. Company B has offered to finish the boards for company A at a fixed cost of $170,000 and a variable cost $0.65 per unit. What is the annual total cost for company A to finish the boards themselves with the new process for the first year? What is the annual total cost for Company A to have company B finish the boards for the first year? Find the point of indifference How many boards would need to be sold in the first year to justify outsourcing the process to company B?

Solution

(a) Annual total cost for Company A to finish boards for themselves is $264,000.

(b) Annual total cost for Company A to have company B finish the boards is $274,000.

(c) The point of indifference = Difference in fixed cost / Difference in variable cost

= 50,000/0.25 = 200,000 Units.

(d) Company to outsource and sold more than 200,000 boards to get more profit because outsource option is having less variable cost.

	Company A	Outsourcing to Company B	Difference
No. of snow boards sales per year	160000	160000
Variable cost per unit	0.90	0.65	0.25
Variable cost	144000	104000
Fixed cost	120000	170000	50000
Annual total cost	264000	274000