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 $8 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 $165,000 and a variable cost of $5 per unit, and Process B would have an annual fixed cost of $190,000 and a variable cost of $4 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

Let x= number of appliances

Calculate breakeven point

8x = $165000 + 5x

3x = $165,000

X = $165,000/3 = 55000

8x = $190,000 + 4x

4x = $190,000

X = 47500

Hence, option B is best.

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