Nancy Schmancy, CEO of Nancy’s Fancies, is trying to decide if it makes sense to outsource their…

Nancy Schmancy, CEO of Nancy’s Fancies, is trying to decide if it makes sense to outsource their jewelry assembly operations. Currently, Nancy employs 17 assemblers, each with an annual salary of $31,000. In addition, Nancy estimates the cost pre piece assembled is around $5 each (for materials and other incidental expenses). Sally Rally claims that they will assemble items for a fixed (one-time) fee of $750,000 and will charge only $3.25 per piece assembled. Last year, a total of 100,000 pieces were assembled at Nancy Schmancy’s Fancies. Answer the following four questions (a through d) and show your answer and your work. a. What was the total cost Nancy experienced last year due to the assembly function? (25%) b. What would the cost have been if Nancy had used Sally Rally last year? (25%) c. What is the indifference quantity between the two alternatives? (25%) d. If Nancy expects the assembly volume to be 150000 orders next year, should she use Sally Rally’s team? In doing this, how much would he save over the alternative? (25%)
a. Total cost Nancy experienced last year due to the assembly function
Work:
Annual salary cost = 17 assemblers × $31,000 = $527,000
Variable cost (materials, etc.) = 100,000 pieces × $5.00 = $500,000
Total cost = $527,000 + $500,000 =
$1,027,000
b. Cost if Nancy had used Sally Rally last year
Work:
Fixed fee = $750,000
Per-piece cost = 100,000 × $3.25 = $325,000
Total cost = $750,000 + $325,000 =
$1,075,000
c. Indifference quantity between the two alternatives
Work (solve for Q where costs are equal):
Nancy cost = $527,000 + $5.00 × Q
Sally cost = $750,000 + $3.25 × Q
Set equal: 527,000 + 5Q = 750,000 + 3.25Q
(5 − 3.25)Q = 750,000 − 527,000 = 223,000
1.75Q = 223,000 → Q = 223,000 / 1.75 = 127,428.571…
Indifference quantity ≈
127,429 pieces
d. Recommendation for 150,000 orders next year and savings
Work:
Nancy cost at 150,000 = $527,000 + ($5.00 × 150,000) = $527,000 + $750,000 = $1,277,000
Sally cost at 150,000 = $750,000 + ($3.25 × 150,000) = $750,000 + $487,500 = $1,237,500
Difference (Nancy − Sally) = $1,277,000 − $1,237,500 =
$39,500
Since Sally’s cost is lower at 150,000 pieces, Nancy should use Sally Rally’s team and would save
$39,500
.