10 Nov Effects of the level of production on an outsourci
Effects of the level of production on an outsourcing decisionOne of Eby Company’s major products is a fuel additive designed to improve fuel efficiency and keep engines clean. Eby, a petrochemical firm, makes and sells 100,000 units of the fuel additive per year. Its management is evaluating the possibility of having an outside supplier manufacture the product for Eby for $2 each. Eby would continue to sell and distribute the fuel additive under its own brand name for either alternative. Eby’s accountant constructed the following profitability analysis.Revenue (100,000 units × $3.50)$350,000Unit-level materials costs (100,000 units × $0.80)(80,000)Unit-level labor costs (100,000 units × $0.12)(12,000)Unit-level overhead costs (100,000 × $0.38)(38,000)Unit-level selling expenses (100,000 × $0.20)(20,000)Contribution margin200,000Fuel additive production supervisor’s salary(80,000)Allocated portion of facility-level costs(20,000)Product-level advertising cost(40,000)Contribution to companywide income$ 60,000
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