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Effects of the level of production on an outsourci

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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