The Neptune Car Company is considering opening a new manufacturing plant to produce a two-

passenger electric mini. The objective is to make 10,000 cars annually at the plant. The size of the

plant depends on which auto parts Neptune decides to outsource. If all parts are made in-house,

the fixed costs are expected to be $100 million and the variable costs are expected to be $4,000

per car. The company is considering the outsourcing of the engine, the drive shaft, and the

dashboard. If each of the parts is outsourced, Neptune estimates the following reduction in fixed

costs and variable costs per car. It has also obtained from an external supplier the following

purchase price for each part:

part reduction in fixed costs reduction in variable costs/unit purchase price

engine $20,000,000 $100 $1200

drive shaft 5,000,000 200 400

dashboard 6,000,000 300 1000

Required

a. Which of the different parts should be outsourced, based on the costs and prices?

b. What other factors should be considered in making the outsourcing decision?