A company produces and sells stereo systems for MP3 players. The following information has been collected about the costs related to the systems:

Selling price per unit = $50 | Variable production cost per unit = $20 | Fixed production costs = $280,000

The company normally produces 20,000 of these systems per year.

The managers are deciding whether to outsource production to a company that has offered to produce these systems for $40 each. The managers estimate that $260,000 of fixed costs could be eliminated if they accept the offer. The variable costs per unit include $12 of direct labor which represents guaranteed payment to its employees.

1. What decision must be made by the company?

2. What are the alternative solutions?

3. Present quantitative solution to the decision. Should the company outsource production?

4. List 3 qualitative factors that might have an impact on your final decision to outsource.