Question

Chapter 11 Assignment i Saved Help Save & Exit Submit Check my work 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 $2.4 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: 0.31 points (8 02:43:33 Annual fixed cost (depreciation) Variable cost per switch Machine A $ 155,000 0.85 Machine B $208,000 0.50 eBook References 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?

Answer 1

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Vista Company
Answer 1	Amount $	Note
Price charged by supplier	2.40	A
Variable cost of machine A	0.85	B
Savings per switch	1.55	C=A-B
In order to be in different as to buy and use Machine A or to buy from external supplier total cost in both alternatives should be same.
So annual volume would be-
Annual fixed cost of Machine A	155,000.00	D
Savings per switch	1.55	E=D/C
Annual volume	100,000.00
Answer 2
If machine A is already purchased then its annual fixed cost is irrelevant. Because fixed cos will continue to incur whether we use Machine A or not.
Now,
Price charged by supplier	2.40	See A
Variable cost of machine A	0.85	See B
Savings per switch	1.55	See C
Vista company will save $ 1.55 per switch if it uses Machine A. So its preferable if it uses Machine A.
Answer 3
If machine A is already purchased then its annual fixed cost is irrelevant. But now if Vista company wants to buy Machine B then it has to compare total costs of both machines. We have to calculate the volume at which company will be
indifferent between Machine A and Machine. For any level above those indifferent units it should buy machine B.
	Amount $
Variable cost of machine A	0.85	See B
Variable cost of machine B	0.50	F
Savings per switch	0.35	G=B-F
Indifferent annual volume would be-
Annual fixed cost of Machine B	208,000.00	H
Savings per switch	0.35	See G
Annual volume	594,285.71	I=H/G
Till annual volume of 594,286 units Vista company should use Machine A.
For any level above 594,286 units Vista company should buy Machine B.