Question

Vista Company manufactures electronic equipment. In 2018, it purchased from an outside supplier the special switches used in each of its products. The supplier charged Vista $2.6 per switch. As an alternative, Vista's CEO considered purchasing either machine A or machine B so the company could manufacture its own switches. The CEO decided at the beginning of 2019 to purchase machine A, based on the following data: Annual fixed cost (depreciation) Variable cost per switch Machine A $141,000 0.60 Machine B $210,000 0.25 Required: 1. Assume that machine A has not yet been purchased. What is the annual volume that would make the company indifferent between the two decision alternatives (i.e., purchasing and then using machine A to make the switches versus purchasing the switches from the outside vendor)? 2. Assume that machine A has already been purchased. Is it preferable to use machine A to make the switches or to purchase the switches from the external supplier? 3. Assume that machine A has already been purchased. At what annual volume level should Vista consider replacing machine A with machine B? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Assume that machine A has not yet been purchased. What is the annual volume that would make the company indifferent between the two decision alternatives (i.e., purchasing and then using machine A to make the switches versus purchasing the switches from the outside vendor)? (Do not round intermediate calculations. Round your final answer up to the nearest whole number.) Indifference point units/year Required 1 Required 2 >

Answer 1

Required 1)

	Machine A	Machine B
Fixed costs (annual)	$      141,000	$      210,000
V.cost per switch	0.60	0.25
Difference in fixed costs	$         69,000
Difference in v.cost per switch	0.35
Indifference point	197,142.86	units per year
Indifference point	197,143	units per year	rounded off

Required 2)

If Machine A has already been purchased
V.cost (from producing Machine A)	0.60
V.cost (buy from outside)	2.60
Saving if made from machine A	2.00

Company should not purchase switches from outside rather it should produce it from machine A

Required 3)

Increase in fixed costs from buying Machine B	$      210,000
Saving in v.cost per switch in Machine B	0.35
Volume at which company would replace machine A by machine B	600,000

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