Alieia Boat Company manufactures 100 luxury yachts per month.A navigation system is included in each yacht.Alieia Boat manufactures the navigation system in-house but is considering the possibility of outsourcing this function.At present,the variable cost per unit is $280,and the fixed costs are $38,000 per month.If it outsources the security system,fixed costs could be reduced by half,and the vacant facilities could be rented out to earn $3000 per month of rental income.What is the maximum contract cost that Alieia should pay for outsourcing?

Question

Quizplus · Accepted Answer

The maximum contract cost that Alieia should pay for outsourcing is any cost lower than $500 per unit. This is because the variable cost per unit is $280, and the fixed costs are $38,000 per month. If Alieia outsources the security system, fixed costs could be reduced by half, and the vacant facilities could be rented out to earn $3000 per month of rental income. This would result in a total cost of $280 + $19,000 - $3,000 = $24,000 per month. This is equivalent to a cost of $24,000 / 100 = $240 per unit. Therefore, Alieia should pay any cost lower than $500 per unit for outsourcing.

Alieia Boat Company Manufactures 100 Luxury Yachts Per Month