You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $75 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $20 direct labor $30 $20 variable overhead fixed overhead $20 total $90 If you outsource the production of compressors (the buy option) in the short term, how will this choice affect your costs and profit? First, compute variable costs under MAKE versus BUY: MAKE BUY unit VC total VC If you outsource (BUY), the incremental revenue, costs, and profit are: how much each amount changes if you outsource Incremental revenue Incremental VC Incremental CM Incremental FC Incremental profit Enter negative amounts with a minus sign, i.e., -1,000 not ($1,000). Should you outsource? ONO - outsourcing reduces profit by $5,000 O YES - outsourcing reduces costs by $5,000 Question 2: Should you reduce the price or increase advertising? The selling price is $40/unit, variable costs are $30/unit, and fixed costs are $3,000 in total. Sales volume decreased to 200 units because of a recession. You are considering two options to stimulate sales: (1) Reduce the price to $38/unit. This will increase sales volume by 20%. (2) Buy additional advertising for $300 and keep the original price. This will increase sales volume by 20%. Use the gross approach to decide whether you should do nothing (the status quo), reduce the price, or increase advertising. status quo (1) reduce the price (2) increase advertising Volume in units Revenue $ $ A Variable costs Contribution margin A Fixed costs $ $ Profit* * enter losses as a negative number: e.g., a loss of $500 should be entered as -500, not as (500) or ($500). What should you do? Reduce the price Increase advertising Do nothing