You are asked to recommend whether a firm should make or purchase product A. The

Question

You are asked to recommend whether a firm should make or purchase product A. The following are data concerning the two options. For the purchase option, the firm can buy product A at $15 per unit. For the make option, the firm can produce product A based on the following cost estimation data. The firm has to pay a weekly rental payment of $34,300 for the production facility. With the use of this facility, the firm also has to hire five operators to help make product A. Each operator works eight hours per day, five days per week at the rate of $14 per hour. In other words, the rental and labor expenses are fixed costs. The material cost for the make option is $8 per unit of product A a. Find a weekly amount of product A that provides the breakeven point for the firm. The breakeven point in this problem indicates the firm's indifference between purchasing or making product A b. If the firm estimates the sale of product A to be 5,600 units per week, should it make or purchase product A? a. A weokly amount of product A that provides the breakeven point lar the frm is units per wook. (Round to the nearest whole number)

Explanation / Answer

Ans a)

to breakeven Profit must be equal to zero that is Revenue= Cost

Assume that we produce 'X' amount of A per week then revenue=15X

Now Rental Cost per week=$34300

Labor Cost=Number of workers*Number of Hours*Number of Days*Wage per Hour=5*8*5*14=$2800

Material Cost=$8X

Cost=34300+2800+8X=15X

37100=7X

X=5300 units /week to breakeven the process

Ans 2)

Yes if they estimate that the production of X is expected to be more than 5300 then it is advisable to produce because then the profits earned will be positive.

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