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 $2.9 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:
Machine A
Annual fixed cost (depreciation) $ 144,000
Variable cost per switch 0.90
Machine B
Annual fixed cost (depreciation $ 213,000
Variable cost per switch 0.40
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?
Part-1 |
Purchase price from outside vendor:- $2.90 |
Manufacturing Cost |
Annual fixed cost= $144000 |
Variable Cost per Switch=0.90 |
Breakeven Point or Indifference Point= Fixed Cost/( Outsider Price- Variable Cost) |
=$144000/(2.90-0.90)=72000 Switches |
Part-2: It's better to Use Machine A to makes the switches. |
Part-3 |
Manufacturing Cost |
Machine A: |
Annual fixed cost:- No Relevant |
Variable Cost per Switch:- $0.90 |
Machine B |
Annual fixed cost= $213000 |
Variable Cost per Switch:- $0.40 |
Breakeven Point =213000/(0.90-0.40) |
= 426000 Unit |
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Current-Control Inc. manufactures a variety of electrical
switches. The company is currently manufacturing all of its own
component parts. An outside supplier has offered to sell a switch
to Current-Control for $32 per unit. To evaluate this offer,
Current-Control has gathered the following information relating to
its own cost of producing the switch internally:
Per
Unit
12,000 Units
per Year
Direct materials
$ 12
$144,000
Direct labour
10
120,000
Variable manufacturing overhead
3
36,000
Fixed manufacturing overhead, traceable
8*
96,000...
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