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 $2.5 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 $148,000 Machine B Annual fixed cost (depreciation) Variable cost per switch $217,000 0.60 0.90 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.

Answer 1

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Part a
$2.5x=	$0.90x+$148,000
$2.5x-$0.90x=	$                 148,000
x=	92,500
Indifferent at volume of	92,500	Switches
Part b
Since Machine A has already been purchased, Its better to use Machine instead of purchasing from outsided.
Since variable costis lower in this case.
Part c
$0.90x+$148,000=	$0.60x+$217,000
$0.30 x=	$                    69,000
x=	230,000
Indifferent at volume of	230,000	Switches
If company is producing more than 230,000 switches, it should repalce machine B with Machine A