A company has the following product information: Buy Product Produce Semi-Automa

Question

A company has the following product information:

                        Buy Product                  Produce Semi-Automated                      Produce Fully Automated

Fixed cost             -------                        $150,000                                           $200,000

Variable cost       $20.00                       $18.00                                                $15.00

What should the company do regarding this product, purchase, produce semi-automated or produce fully automated?

At what volume would the company be indifferent to buying the product or producing it semi-automated?

Explanation / Answer

based on the demand of the product, the company can decide wether it should buy or produce.

suppose if the demand is more than 75,000 units, then it is better to go for produce semi-automated, if the demand is for more than 145,000 units, it is better to go for fully produce.

at 75000 units the buying cost of the products= 75000*20= $1,500,000

at the same production, the total cost is= 150,000+ (75,000*18)= 150,000+1,350,000= $1,500,000

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