Cost Scenario

1

Name

Unit name

Unit code

Date

ClearHear is faced with three alternatives to produce the product outsource the manufacture to original equipment manufacturer (OEM , or manufacture part of the product and outsource the rest . If the company decides to manufacture the product then the profitability will be as follows

Option 1 : manufacture of all product

The 70 ,000 unit will be produced using the alpha line so contribution will be

Price 15

Variable cost 8

Contribution per unit 7 The 30 ,000 will be

produced using the Beta line hence contribution will be

Price 15

Variable cost 12

Contribution per unit 3 however there is an opportunity cost in producing at beta line since it was operating at full capacity hence the line will stop production of 30 ,000 Beta models hence opportunity cost will be (contribution per unit number of units

2

Contribution per unit of Beta model : 30-12 18

Opportunity cost : 30 ,000 18 240 ,000 Contribution alpha line 490 ,000

Contribution Beta line 90 ,000

Opportunity cost (540 ,000

Contribution 40 ,000

Therefore if ClearHear decide to manufacture all the product contribution will increase by 40 ,000

Option 2 : outsourcing manufacture to original equipment manufacturer

Where ClearHear outsource the manufacture to OEM incremental income will be

Price per unit 15

Cost per unit 14

Contribution per unit 1 Option 3 : manufacture...