A firm plans to begin production of a new small appliance. The manager must deci

Question

A firm plans to begin production of a new small appliance. The manager must decide whether to purchase the motors for the appliance from a vendor at $10 each or to produce them in-house. Either of two processes could be used for in-house production; Process A would have an annual fixed cost of $170,000 and a variable cost of $6 per unit, and Process B would have an annual fixed cost of $195,000 and a variable cost of $5 per unit. Determine the range of annual volume for which each of the alternatives would be best. (Round your first answer to the nearest whole number. Include the indifference value itself in this answer. Enter your last answer as a whole number).

For annual volumes of __________ or less, A) production in house at $5 per unit OR B)purchase from the vendor OR C) production in house at $6 per unit  is best.  

For annual volumes at or above that amount, it is best to produce in house at a variable cost of $____ per unit.

A firm plans to begin production of a new small appliance. The manager must decide whether to purchase the motors for the appliance from a vendor at $10 each or to produce them in-house. Either of two processes could be used for in-house production; Process A would have an annual fixed cost of $170,000 and a variable cost of $6 per unit, and Process B would have an annual fixed cost of $195,000 and a variable cost of $5 per unit. Determine the range of annual volume for which each of the alternatives would be best. (Round your first answer to the nearest whole number. Include the indifference value itself in this answer. Enter your last answer as a whole number).

Explanation / Answer

Total cost TC = Fixed cost + Variable cost*Quantity

Vendor total cost = 10Q

Option 1 TC = 170000 + 6Q

Option 2 TC = 195000 + 5Q

By equalling the total cost we get the breakeven point

Vendor TC = Option 1 TC

10Q = 170000 + 6Q

Q = 42500

Vendor TC = Option 2 TC

10Q = 195000 + 5Q

Q = 39000

Option 1 TC = Option 2 TC

170000 + 6Q= 195000 + 5Q

Q = 25000

From this we can say for annual volumes of 39000 or less purchase from the vendor is best

For annual volumes at 39000 or above that amount, it is best to produce in house at a variable cost of $5 per unit.

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