The Albany Engineering Co Ltd has the option to make or buy one of its component
ID: 2609666 • Letter: T
Question
The Albany Engineering Co Ltd has the option to make or buy one of its component parts. The annual requirement is 8,500 units. A supplier is able to supply the parts for $13 per piece. The firm estimates that it costs $3,700 to prepare the contract with the supplier. To make the part in-house, the firm must invest $23,500 in capital equipment and estimates that the parts cost $10 per piece. Complete the table below.
Important! Enter all responses as whole numbers with a comma as needed (#,###).
Should the firm make or buy? (Enter Make or Buy)
What is the break-even quantity? (Enter as ##,### or #,###)
What is the total cost at the break-even point? (Enter as ###,### or ##,###)
$
Assume instead that the annual requirement is 5,500; calculate the total cost for both options and the cost savings for choosing the cheaper option.
Total cost for making at 5,500 units: (Enter as ###,### or ##,###)
$
Total cost for buying at 5,500 units: (Enter as ###,### or ##,###)
$
Cost savings from choosing the cheaper option: (Enter as ##,### or #,###)
$
Explanation / Answer
SOLUTION:- costs if firm make the product
capital equipment=23500
cost per units =10=8500*10=85000
total costs =108500
costs if firm buy the product:-
8500*13=110500
it is recommended to make the product because it gives the benefit of 2000 over the proposal of buying.
break even quantity:-
fixed cost/ contribution per unit
=23500/13-10
7833 units
total cost at break even point = fixed costs = 23500
variable costs =7833*10= 78330
total costs at break even point =101830
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