Outsourcing or capacity expansions: Application of activity-based costing model on joint products decisions

Because of capacity constraints, the companies who produce joint products have to assess the desirability of further processing joint products beyond the split-off point. Especially in a situation in which market demands exceed the companyʹs production capacity. In order to satisfy customerʹs orders and maximize total profits, these companies must study the feasibility of expanding capacity or outsourcing the production of parts. The aim of this paper is to develop an ABC joint products decision model which incorporates capacity expansions and outsourcing features, by using a mathematical programming approach. With the model presented in this paper, we can evaluate the comparative benefits of expanding the various kinds of capacity and outsourcing simultaneously. By applying this model, the companies who produce joint products can derive an optimal decision about further processing, capacity expansions or outsourcing.