Vista Company manufactures electronic equipment. In 2015, it purchased from an o
ID: 2571896 • Letter: V
Question
Vista Company manufactures electronic equipment. In 2015, it purchased from an outside supplier the special switches used in each of its products. The supplier charged Vista $2.50 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 2016 to purchase machine A, based on the following data:
Assume that machine A has not yet been purchased. What is the indifference point between purchasing machine A and purchasing the switches from the outside vendor? (Do not round intermediate calculations.)
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?
At what volume level should Vista consider replacing machine A with machine B? (Do not round intermediate calculations. Round up your final answer to the nearest whole number.)
May I receive a step-by-step walkthrough of each part.
Vista Company manufactures electronic equipment. In 2015, it purchased from an outside supplier the special switches used in each of its products. The supplier charged Vista $2.50 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 2016 to purchase machine A, based on the following data:
Explanation / Answer
1. Let the Indifference point in purchasing machine A and purchasing the switches from the outside vendor be X
$153000 + $0.80X = $2.50X
X = 90000 switches
2. If machine A has already been purchased, the fixed cost of $183000 become irrelevant for this decision making and so only cost to be compared is $0.80 and $2.50. Hence is will be preferrable to use machine A to make the switches.
3. Let the Indifference point in purchasing machine A and purchasing the switches from the outside vendor be X
$153000 + $0.80X = $222000 + 0.45X
X = 197143
At volume level of 0 to 197143 units, Vista consider replacing machine A with machine B.
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