A company asked one of their analysis team to analyze and create models that help decide whether they should manufacture a particular product or outsource its production. The different components are given below
Fixed Cost, FC = $25,000
Material Cost per Unit, MC = $2.15
Labor Cost per Unit, LC = $2.00 Outsourcing Cost per Unit, O = $4.50
?
- Build an influence diagram that illustrates how to calculate the difference in cost of manufacturing and outsourcing.
- Using mathematical notation, construct a mathematical model for calculating the difference in cost of manufacturing and outsourcing.
- Implement your model from part (b) in an Excel spreadsheet model using the principles of good spreadsheet design.
- Using the spreadsheet model, what will be the resulting savings due to outsourcing if the company wants to make 30,000 units of a particular product?
b. Savings by Outsourcing (SBO) is the difference between the Total Outsource Cost (TOC) and the Total Manufacturing Cost (TMC)
?
SBO = TOC – TMC
The cost-volume model for manufacturing q units is
TMC = FC + ((MC + LC) × q)
And, a mathematical model for outsourcing q units is
TOC = O × q
c.
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