Consider an economy which produces and sells, among a host of other things, 100 million T-shirts a year. The average T-shirt begins life when a farmer plants seeds she put away last year, waters them, harvests the cotton, then sells the cotton to a mill for $0.75, which sells the fabric to a T-shirt factory for $1.50, which sells the T-shirt to a wholesaler for $5, who sell it to Nordstrom for $10, which finally sells it to you for $17. Calculate the income earned for each firm involved in the production of T-shirts. Then, calculate the total income contribution from T-shirt production to GDP. a. The farmer earns $ per T-shirt. b. The mill earns $ per T-shirt. c. The T-shirt factory earns $ per T-shirt. d. The wholesaler earns $ per T-shirt. e. Nordstrom earns $ per T-shirt. f. Total income earned: $ billion

Cool System should choose to Make the switch.

Explanation:

Outsourcing analysis which considers only the relevant variable cost per unit can be prepared as follows:

Details                        Make ($)       Outsource ($)      Difference ($)

                                        A                       B                       C = A - B          

Direct materials           5.00                                                5.00          

Direct labor                  3.00                                                3.00

Variable overhead      6.00                                                 6.00

Outsourcing price                                  15.00                 –15.00  

Total differential        14.00                 15.00                   –1.00

The analysis above shows that the total differential per unit is minus $1 which indicates that outsourcing is $1 per unit more expensive than make. Therefore, Cool System should choose to Make the switch.