Most published studies adopt a throw-away cost model to solve minimum production cost problems, without considering subsequent risk-based contingent costs at the product design stage. The design-function-oriented cost model proposed in this study considers multi-characteristic quality specifications, product design functions, and subsequent risk-based contingent costs of a product for minimizing total costs during the initial product design stage. The optimization of in-house manufacturing process selection and quality assessment for outsourcing is associated with variation/cost functions. An adjustable managerial contingent cost coefficient was used to enable design teams to make appropriate trade-offs at various stages of the life cycle of product marketing based on the product’s intended strategic market position. An empirical case study demonstrated the efficacy of the proposed model as one that can be easily understood and applied by any organization. The results and processes of the case study also provide useful managerial implications.