The Fox Time Travel (Fox TT) company sells flux capacitors to time machine manuf
ID: 454990 • Letter: T
Question
The Fox Time Travel (Fox TT) company sells flux capacitors to time machine manufacturers. This year Fox TT is on track to sell 12,500 units. They are forecasting a 25% increase for the following year. They currently outsource a circuit board to an outside manufacturer, Biff Electronics, who charges Fox TT $15,000 per year for system maintenance and upkeep. They sell each of the circuit boards to Fox TT for $25.00 each with an additional charge of $1.00 per unit for transportation. Fox TT is thinking about making these circuit boards in-house. They have researched the costs and found the following: Machines cost $125,000, floor reinforcement and machine installations will cost $10,000, and start-up costs will be $5,000. Fox TT can produce this circuit board at a labor cost of $3.00 per unit and raw materials cost of $15.00 per unit.
1) Calculate the Breakeven point
2) Decide what Fox TT should do, Continue to Buy or invest in the changeover and Make the circuit boards. State which should happen, Make or Buy and explain why.
The Fox Time Travel (Fox TT) company sells flux capacitors to time machine manufacturers. This year Fox TT is on track to sell 12,500 units. They are forecasting a 25% increase for the following year. They currently outsource a circuit board to an outside manufacturer, Biff Electronics, who charges Fox TT $15,000 per year for system maintenance and upkeep. They sell each of the circuit boards to Fox TT for $25.00 each with an additional charge of $1.00 per unit for transportation. Fox TT is thinking about making these circuit boards in-house. They have researched the costs and found the following: Machines cost $125,000, floor reinforcement and machine installations will cost $10,000, and start-up costs will be $5,000. Fox TT can produce this circuit board at a labor cost of $3.00 per unit and raw materials cost of $15.00 per unit.
1) Calculate the Breakeven point
2) Decide what Fox TT should do, Continue to Buy or invest in the changeover and Make the circuit boards. State which should happen, Make or Buy and explain why.
Explanation / Answer
1. Break Even Point
Total fixed cost = $125000 + $10000 + $5000 = $140000
Cost to manufacture 1 unit = $3 + $15 = $18
Fox TT is buying the circuit board from Biff @ $25 /unit so let us consider after manufacturing FOX TT sells it at same rate
Fixed Cost = $140000
Gross Profit Margin = (26-18)/26 = 30.77%
Break Even Point = $466666 or 17500 units
2. FOX TT should start making circuit boards in house as when it buys from Biff it's cost price comes to $27/unit considering the maintenance charges.
But when it starts manufacturing in house and after 17500 it achieves breakeven and after that the total cost per units comes to $18 which is 30.77 % cheaper than buying it from Biff
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