Emery Products is deciding whether to outsource the production of a certain component that is included in all of its products
It currently costs Emery Products $1.20 to make each component in-house. If Emery Products outsources, it can buy the component ready-made for $0.90 each and can shut down the production facilities it is currently using to manufacture the component and save $20,000 a year in fixed costs. Annual requirement for the component is 12,000 units. What is the effect of outsourcing?
What will be an ideal response
Variable cost per unit $1.20
Cost per unit if outsourced (0.90 )
Net savings $0.30
No. of units x 12,000
Total net saving $3600.00
Add: Savings in fixed cost $20,000.00
Total savings if outsourced $23,600.00
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