Question

A firm plans to begin production of a new small appliance. The manager must decide whether...

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 $9 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 $170,000 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).

  

For annual volumes of_______ or less, (Purchase from vendor, production in house at $4 per unit, or production in house at $5 per unit). For annual volumes at or above that amount, it is best to produce in house at a cost of $______per unit.
0 0
Add a comment Improve this question Transcribed image text
Answer #1

The point of indifference between Purchase from Process A and Process B

Machine A =      Machine B

       FC + VC * Q =    FC + VC * Q

FC = Fixed Cost , VC = Variable Cost , Q = Number of Appliance ( Quantity in Units)

Total Cost = FC + VC * Q

$170,000 + $5Q = $190,000 + $4Q

Q = 20,000

The point of indifference between Purchase from Vendor and Process A

$9Q = $170,000 + $5Q

Q = 170,000 / 4

Q = 42500

The point of indifference between Purchase from Vendor and Process B

$9Q = $190,000 + $4Q

$5Q = $190,000

Q = 38,000

Unit Process A ( Total Cost) Process B (Total Cost) Outsource from vendor ( Total Cost)
5000 195000 210000 45000
10000 220000 230000 90000
15000 245000 250000 135000
20000 270000 270000 180000
25000 295000 290000 225000
30000 320000 310000 270000
35000 345000 330000 315000
38000 360000 342000 342000
38001 360005 342004 342009
42500 382500 360000 382500
40000 370000 350000 360000
50000 420000 390000 450000
60000 470000 430000 540000
70000 520000 470000 630000
80000 570000 510000 720000

Comparing the Total Cost in the above table we conclude that
(i) For Annual Volume of 38,000 or above  the manager should select
production in house at $4 per unit. ( Process B)

(ii) For Annual Volume of 38,000 or less, the manager should purchase from vendor.

(iii) Process A (production in house at $5 per unit) is never the best alternative.

For annual volumes of 38,000 or less, Purchase from vendor. For annual volumes at or above that amount, it is best to produce in house at a cost of $5 per unit.

Add a comment
Know the answer?
Add Answer to:
A firm plans to begin production of a new small appliance. The manager must decide whether...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • A firm plans to begin production of a new small appliance. The manager must decide whether...

    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 $175,000 and a variable cost of $7 per unit, and Process B would have an annual fixed cost of $195,000 and a variable cost of $6 per...

  • A firm plans to begin production of a new small appliance. The manager must decide whether...

    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 for $7 each or to produce them in-house. Either of two processes could be used for the in-house production. Production Option One would have an annual fixed cost of $160,000 and a variable cost of $5 per unit. Production Option Two would have an annual fixed cost of $190,000 and a variable cost of...

  • A firm plans to begin production of a new small appliance. The manager must decide whether...

    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 for $6.50 each or to produce them in house. There are two in house options. Option 1 would have an annual fixed cost of $161000 and a variable cost of $5.80. Option 2 would have an annual fixed cost of $193000 and a variable cost of $3.90. Calculate the maximum quantity that would have...

  • A firm plans to begin production of a new small appliance. The manager must decide whether...

    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 for $6.70 each or to produce them in house. There are two in house options. Option 1 would have an annual fixed cost of $161000 and a variable cost of $5.90. Option 2 would have an annual fixed cost of $194000 and a variable cost of $4.10. Calculate the maximum quantity that would have...

  • A firm plans to begin production of a new small appliance. The manager has three options:...

    A firm plans to begin production of a new small appliance. The manager has three options: Option 1: purchase the motors for the appliance from a vendor at $9 each Option 2: produce them in house using technology A with an annual fixed cost of $40000 and a variable cost of $4 per unit Option 3: produce them in house using technology B with an annual fixed cost of $125000 and a variable cost of $3 per unit The range...

  • Options for click to select are (Process A, Process B, and Purchase from vendor)

    Options for click to select are (Process A, Process B, and Purchase from vendor) A firm plans to begin production of a new appliance, and must decide whether to purchase the motors for the appliance from a vendor at $7 each or to produce them in-house. In-house Process A would have an annual fixed cost of $160,000 and a variable cost of $5 per unit, and in-house Process B would have an annual fixed cost of $190,000 and a variable...

  • a firm plans to begin production of a new small appliance. The manager has three options:...

    a firm plans to begin production of a new small appliance. The manager has three options: Option 1: purchase the motors for the appliance from a vendor at $6 each Option 2: produce them in house using technology A with an annual fixed cost of $15000 and a variable cost of $4 per unit; or Option 3: produce them in house using technology B with an annual fixed cost of $20000 ad a variable cost of $2 per unit. The...

  • A manager is trying to decide whether to purchase a certain part or to have it...

    A manager is trying to decide whether to purchase a certain part or to have it produced internally. Internal production could use either of two processes. One would entail a variable cost of $17 per unit and an annual fixed cost of $200,000; the other would entail a variable cost of $14 per unit and an annual fixed cost of $240,000. Three vendors are willing to provide the part. Vendor A has a price of $20 per unit for any...

  • The division manager of an appliance manufacturing firm must decide on the daily production level 9 for an electric mix...

    The division manager of an appliance manufacturing firm must decide on the daily production level 9 for an electric mixer. The plant manager where these mixers are produced has reported that daily total fixed costs are $750, while average variable costs (in dollars) are approximately v = 75 - .049 +.0000897 where q is the production level per day. The marketing director reports that the mixers can be sold to wholesale distributors for a price of p = 85-.039 (in...

  • A newly formed firm must decide on a plant location. There are two alternatives under consideration:...

    A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $181 in either case. Omaha Kansas City Annual fixed costs...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT