Question

Problem 2 (10 points)

You are given the following information:

Costs	Make Option	Buy Option
Fixed Cost	$25,000	$3,000
Variable Cost	$8	$12

1. Find the break-even quantity and the total cost at the break-even point. (4 points)
2. If the requirement is 4,500 units, is it more cost-effective for the firm to buy or make the components? What is the cost savings for choosing the cheaper option? (3 points)
3. If the requirement is 6,000 units, is it more cost-effective for the firm to buy or make the components? What is the cost savings for choosing the cheaper option? (3 points)

Answer 1

a) Find the break-even quantity and the total cost at the break-even point Break even Quantity- Fixed Costs Price per unit-Varible cost of unit Fixed Costs (A)25,000-3,000 22,000 Price per unit-Varible cost of unit (B) 4 BEQA/B 22000 4 5500 units Total Cost for both options are $25,000+($8*5,500) 69,000

b) Total cost for the market option is $25,000+($8*4,500) $61,000 $3,000+ ($12*4,500) $57,000 Total Cost for the buy option is The more cost-effective for the firm is to buy The cost savings to buy is $4,000

$25,000+($8*6000) $73,000 c) Total cost for the make option is Total cost for the buy option is- $3,000+ ($12*6,000) $75,000 The more cost-effective for the firm is to make The cost savings to make is $2,000