I'm curious about the structure of the answer for Question 2.
For the outsource option, the answer suggests that the volume required for insourcing to be profitable is greater than 20M….(X-20M)(*2) + (20M)*(2.25).
If the volume were 15M, then the second factors of this equation can't hold true. Does anyone have a different way of solving this?
Yes, the formula doesn't work if volumes are below 20M however you have to notice that…
…in the in-house option, the initial investment is $50M, meaning that you need to sell 20M bottles with $2.5 margin to make any money.
So if the volumes are below 20M, outsourcing is always better.
If volumes are above 20M, you should use the suggested formula.
Hey Tim!
Could you provide a bit more context here?
What are the values provided and what is the case actually asking you to calculate?
Hi!!
In cases when margins are equal to or higher than $2.5, insourcing would never beat outsourcing. In other cases, the formula still applies.
Take an example of a tricky case where X is cancelled out, if volumn were 15M, and for example investment cost were 30M, margin would have to be $2 → cost to self-produce were $2.5 (just as high as the highest cost to outsource), which means there's no way insourcing can beat outsourcing.
Thus, I think the formula still works, and we may need to look outside the formula a bit :)
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