A global manufacturer of electrical switching equipment (ESE) is considering outsourcing the manufacturing of an electrical breaker used in the manufacturing of switch boards. The company estimates that the annual fixed cost of manufacturing the part in-house, which includes equipment, maintenance, and management, amounts to $8 million. The variable cost of labor and materials are $11.00 per breaker. The company has an offer from a major subcontractor to produce the part for $16.00 per breaker.
a. How many breakers would the electrical switching equipment company need per year to make the in-house option the least costly?
b. Assume the subcontractor wants the company to share in the costs of the equipment. The ESE Company estimates that the total annual cost would be $5 million, which also includes management oversight for the new supply contract. For this concession, the subcontractor will drop the per unit price to $12.00. Under this assumption, how many breakers would the ESE Company need per year to make the in-house option least costly?
c. If the ESE manufacturer is expecting to use 1,500,000 breakers per year, which option (make in-house, use sub-contractor without sharing in the cost of equipment, use subcontractor with sharing in the cost of equipment) is the least costly?