[LO 11-3] 11-25 Make or Buy: Continuation of Exercise 9-25 (Chapter 9) Vista Com

Question

[LO 11-3] 11-25 Make or Buy: Continuation of Exercise 9-25 (Chapter 9) Vista Company manufactures electronic equipment. In 2012, it purchased the special switches used in each of its products from an outside supplier. The supplier charged Vista $2 per switch. Vista's CEO considered purchasing machine A or machine B so the company could manufacture its own switch at the beginning of 2013 to purchase Machine A, based on the following es. The CEO decid data: ed Machine A Machine B Annual fixed cost Variable cost per switch $135,000 $204,000 0.30 0.65 Required 1. For machine A, what is the indifference point between purchasing the machine and purchasing from the outside vendor? 2. At what volume level should Vista consider purchasing Machine B? 3. Use the Goal Seek function in Excel to determine the volume-indifference level you calculated above in requirement 2.

Explanation / Answer

1. For Machine A:=$135,000÷($2-$0.65)

                 = 100,000 switches

Indifference Point =100000 switches

2. Indifference level:

= ($204,000-$135,000)÷(0.65-0.30)

= 197,142.86 or 197,143 units

If producing more than 197,413 switches machine B will be selected

3. Volume Indifference level will be same.

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