CAF-5 · Chapter 15 · Question 5 of 10
A company manufactures multiple products using a scarce machine hour resource. It cannot meet total market demand and must outsource the production of one of its products to an external supplier. What is the optimal strategy for determining which product to outsource first?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Outsource the product that has the lowest extra cost of external purchase per scarce machine hour saved.
Explanation
When dealing with a limiting factor and a make-or-buy option, the company must evaluate the cost penalty of buying externally versus making internally. The optimal ranking for outsourcing is based on finding the lowest extra cost incurred per unit of the limiting factor saved.
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