Shuzworld would like to start producing a new sneaker. This new sneaker will be brightly colored and would be marketed to both pre-teens and teens. As with any sales business they want to know that the shoe could be profitable before they start the expense of producing the shoe. They have three options for producing the shoes, recondition their existing machine at the Shanghai facility and manufacture the shoes there, buy new equipment for the Shanghai facility to produce the shoes or outsource the manufacturing to a facility in China. We have been asked to determine which option would be most cost efficient.
We have been given some information to use during our analysis. It is estimated that to recondition the current equipment at the Shanghai plant would have fixed costs of $50,000 and variable costs of $1,000, for each unit of 1,000 sneakers. Buying new equipment would have fixed costs of $200,000 and variable costs of $500 per 1,000 sneakers. Our last option of outsourcing the manufacturing process would costs us nothing up front (fixed costs) but would have variable costs of $3,000 for every 1,000 sneakers.
Below in the Breakeven Analysis you can see the breakdown of this information. Option 1, reconditioning our current equipment vs. buying new our breakeven point is 300 units and $350,000. Option 2 is reconditioning our current equipment vs. outsourcing. The breakeven point is 25 units and $75,000. Option 3 is buying new equipment vs. outsourcing and our breakeven point is 80 units and $240,000.
My recommendation based on the facts given would be to purchase new equipment. This has the lowest variable cost at $500. for every 1000 sneakers and allows us to make a profit at 300 units. Since this new sneaker is going to be a big hit with the teens and tweens we anticipate selling I large volumes and this option will give us the greatest profit as well as give us equipment that will last for years to come with...