At this demand level the total cost will be the same for both alternatives. If actual forecasted demand is greater than 5000 unites, then outsourcing is chapter. If the demand is less than 5000 units, it is chapter to make in house.

ABC Company wants to determine whether a component should be manufactured in house or outsourced. The followings table gives related data.

In-house : Annual Fixed Cost, Fin $80000
Variable cost/unit Vin $10

Out Source: Annual Fixed Cost, Fou $120,000
Variable cost/unit. Vou $5

Find

A) Break even Annual Demand

B) If annual demand is 10,000 unites which option would you recumbent ? … Explain

At this demand level the total cost will be the same for both alternatives. If actual forecasted demand is greater than 5000 unites, then outsourcing is chapter. If the demand is less than 5000 units, it is chapter to make in house.

For a given demand, you can also use the total cost to compare the alternatives.

Total Cost = Annual Fixed Cost + (variable cost/unit) Demand.