Seven Seas Company manufactures 100 luxury yachts per month.Included in each yacht is a compact media centre.Seven Seas manufactures the media centre in-house,but is considering the possibility of outsourcing that function,in order to close down some of their facilities and reduce the administrative costs.At present,the variable cost per unit is $300 and the fixed costs are $36,000 per month.Assuming that if they outsource,and the fixed costs could be eliminated entirely,at what contract rate would outsourcing pay off for Seven Seas? Round to nearest whole dollar.

Question

Quizplus · Accepted Answer

If Seven Seas outsources the production of the media centers, the only cost they would have is the variable cost per unit which is $300. Since the fixed cost ($36,000) could be eliminated entirely, the break-even contract rate can be calculated as follows:

Break-even rate = Fixed costs / Units + Variable cost per unit
Break-even rate = $36,000 / 100 + $300
Break-even rate = $360 + $300
Break-even rate = $660 per unit

Therefore, outsourcing would pay off for Seven Seas at any rate lower than $660 per unit. The closest option is D, which is lower than $660, so it is the best choice.

Seven Seas Company Manufactures 100 Luxury Yachts Per Month