Seven Seas Boat Company manufactures 100 luxury yachts per month.A security system is included in each yacht.Seven Seas Boat Company manufactures the security system in-house.The company is considering the possibility of outsourcing the production of the security system in order to close down some of its facilities and reduce administrative costs.At present,the variable cost per unit is $300,and fixed costs are $38,000 per month.Assuming the company outsources the production of the security system and the fixed costs could be eliminated entirely,at what contract cost would outsourcing pay off for Seven Seas? (Round to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

If the company outsources, it eliminates the fixed costs of $38,000. The current total cost per month is $300 (variable cost) * 100 (units) + $38,000 (fixed costs) = $68,000. To make outsourcing worthwhile, the total outsourcing cost should be less than $68,000. Dividing $68,000 by 100 units gives $680 per unit.

Seven Seas Boat Company Manufactures 100 Luxury Yachts Per Month