1. The manager of Green Daisy Inc. is in the process of deciding whether to make
ID: 2715074 • Letter: 1
Question
1. The manager of Green Daisy Inc. is in the process of deciding whether to make or buy carburetors for its power lawn mowers. If Green Daisy decides to manufacture the carburetor, it could utilize one of two manufacturing processes. The first process would entail a variable cost of $17 per unit and an annual fixed cost of $200,000, while the second process would entail variable cost of $14 per unit and an annual fixed cost of $240,000. The manager knows of three vendors who are capable and willing to provide the carburetor. Vendor A charges $20 per unit for any volume up to 30,000 units and cannot supply Green Daisy’s need for volume above 30,000 units due to its capacity restrictions. Vendor B offers a price of $22 per unit for a demand of 1,000 units or less and $18 per unit for each unit above the 1,000 units. Vendor C’s price is $21 per unit for the first 1,000 units and $19 per unit for any additional units. The manager is unsure about what the demand is going to be for power lawnmowers. a) If the demand is forecasted to be 10,000, 20,000, 28,000, or 60,000 units, which alternative would be best from a cost standpoint? b) What is the break-even volume of internal process 1, if we use the best price external option? c) What is the break-even volume of internal process 2 if we use the best price external option? d) Determine the range for which each alternative is best.
Explanation / Answer
1)b) let break-even volume of internal process 1=v
Total cost=200,000+17v
If a)choose A then at break-even volume v,Total cost=Total Revenue
=>200,000+17v=20*v =>v=200,000/3=66667 is not possible as v<=30000
If b)choose B then at break-even volume v,Total cost=Total Revenue
=>200,000+17v=22*1000+18*(v-1000) =>v=200,000-(22000-18000)=196000
If c)choose C then at break-even volume v,Total cost=Total Revenue
=>200,000+17v=21*1000+19*(v-1000) =>v=(200,000-(21000-19000))/2=99000
Thus, break-even volume of internal process 1, if we use the best price external option is 99000 units.Because we are break even at lowest volume of 99000 units ,C is the best option which offers the best price .
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.