Make or Buy: Vista company manufactures electronic equipment. In 2015, it purcha

Question

Make or Buy:

Vista company manufactures electronic equipment. In 2015, it purchased from an outside supplier the special switches used in each of its products. The supplier charged Vista $2 per switch. AS an alternative, Vista's CEO considered purchasing either Machine A or Machine B so the company could manufacture its own switches. The CEO decided at the beginning of 2016 to purchase Machine A, based on the following data:

1) Assume that machine A has already been purchased. Is it preferable to use machine A to make the switches or to purchase the switches from an external supplier?

2) At what volume level should Vista consider replacing Machine A with Machine B?

Explanation / Answer

1) Statement showing computations Particulars Make Buy Difference Costs to make                              0.65                      0.65 Costs to purchase                              2.00                    (2.00) Total costs                              0.65                              2.00                    (1.35) Annual Fixed Costs                 135,000.00 Unit level after which it is preferable to purchase = 135,000/1.35                 100,000.00 Thus it is preferable to make after 100,000 units if company can sell the machine at its cost 2) Indifference Point = diff in FC/Diff in VC Indifference Point = (204,000-135,000)/(.65-.30) Indifference Point = (69,000)/(.35) Indifference Point = 197,142.86 Units At Volume of or more than 197,143 Units company should replace machine A with Machine B

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