| Nowlin Plastics produces a line of cell phone covers. |
| Its best-selling cover is its Viper model, a slim but very durable black and gray plastic cover. |
| The annual fixed cost for the Viper cover is $234,000. | This includes management time, advertising, and other costs that are incurred regardless of the number of units eventually produced. |
| In addition, the total variable cost is $2 for each unit produced. | This includes labor and material costs |
| Nowlin is considering outsourcing the Viper production for next year |
| The company has a bid from an outside firm to produce the Viper for $3.50 per unit. | Although it is more expensive per unit to outsource the Viper ($3.50 versus $2.00), the fixed cost can be avoided if Nowlin purchases rather than manufactures the product. |
| The exact demand for Viper for next year is not yet known. |
| Objective |
| Nowlin would like to compare the costs of manufacturing the Viper in-house to those of outsourcing its production to another firm, and management would like to do that for various production quantities. | Many manufacturers face this type of decision, which is known as a make-versus-buy decision. |
| Make: | The cost-volume model for producing q units is
TMC(q) = FC + (VC × q)
|
| Buy | Mathematical model for purchasing q units is
TPC(q) = Pq
|
| Goal: | Savings associated due to outsourcing
S(q) = TMC(q) – TPC(q)
|