Seven Seas Company manufactures 100 luxury yachts per month.Included in each yacht is a compact media center.Seven Seas manufactures media center in-house,but is considering the possibility of outsourcing that function.At present,the variable cost per unit is $280 and the fixed costs are $39,000 per month.If they outsource,fixed costs could be reduced by half and the vacant facilities could be rented out to earn $1000 per month of rental profit.At what contract rate would outsourcing pay off for Seven Seas?

Question

Quizplus · Accepted Answer

To find the contract rate at which outsourcing would pay off, we need to compare the total costs of manufacturing in-house with the costs of outsourcing.

Total cost of manufacturing in-house: 
Variable cost per unit = $280 
Fixed costs per month = $39,000 
Total cost = $39,000 + ($280 x 100) 
= $67,000

Total cost of outsourcing: 
Variable cost per unit = unknown (let's call it X) 
Fixed costs per month = $39,000/2 = $19,500 
Rental profit per month = $1000 
Total cost = $19,500 + ($X x 100) - $1000 
= $18,500 + ($X x 100)

For outsourcing to be profitable, the total cost of outsourcing must be lower than the total cost of manufacturing in-house.

$18,500 + ($X x 100) < $67,000 
($X x 100) < $48,500 
$X < $485

Therefore, outsourcing would be profitable if the contract rate is less than $485 per unit.

The only option that meets this criteria is B, which is $485 per unit. Therefore, the correct answer is:

Answer: B

Seven Seas Company Manufactures 100 Luxury Yachts Per Month