Question

A large global automobile manufacturer is considering outsourcing the manufacturing of a solenoid used in the transmission of its SUVs. The company estimates that annual fixed costs of manufacturing the part? in-house, which include? equipment, maintenance, and? management, amounts to ?$8.9 million. The variable costs of labor and material are $6.25 per unit. The company has an offer from a major subcontractor to produce the part for $10.00 per unit.? However, the subcontractor wants the company to share in the costs of the equipment. The automobile company estimates that the total cost would be $4.9 million, which also includes management oversight for the new supply contact.

a) How man solenoids would the automobile company need per year to make the in-house option least costly?

-The company must consume (more than/less than) ______ solenoids to make the manufacturing the part in-house option least costly. (Enter your response rounded to the nearest whole number).

b) What other factors, besides costs, should the automobile company consider before revising its supply chain for SUVs?

Please show all work step-by-step.

Answer 1

To find breakeven point, cost of both in house and outsourcing should match

Let x be units of break-even

Total cost = Fixed cost + x*Variable cost

Total cost of in house = 8.9*10^6 + 6.25*x

Total cost of outsourcing = 4.9*10^6 + 10*x

8.9*10^6 + 6.25*x = 4.9*10^6 + 10*x

4*10^6 = 3.75*x

x = 1,066,667

a) Hence, the option of in house will be least cost when number of solenoids are more than 1,066,667

b) The other factors to consider are:

• Quality of products made by sub-contractor must meet the requirement
• The supply reliability from sub-contractor to have timely delivery