2. A company\'s manager must decide whether to make or buy a certain item use pr
ID: 2800569 • Letter: 2
Question
2. A company's manager must decide whether to make or buy a certain item use production of Injection Molding machines. Cost and volume estimates are as follows: Make Annual fixed cost $ 300,000 | Variable cost/unit $ 120 |Annual Volume (units) 24,000 Buyo Buy None None $ 160 $ 160 | 24,000 24,000 a) Determine the annual cost of each alternative. b) Should the firm buy or make this item? c) There is a possibility that volume could change in the future. At what volume would the manager be indifferent between making and buying? d) Draw the break-even chart and comment on the results.Explanation / Answer
Answer for question no.a:
Annual cost of each alternative is as follows:
Answer for question no.b:
As the cost of buying is more than the cost of making, the firm should make the produce.
Answer for question no.c:
If the total cost of producing and selling is same then the firm would be indifferent to buying and making.
Therefore cost of buying and cost of making is same.
ie., at this point both are same.
=$3,840,000
Variable costs excluding fixed costs=$3,84,000 - fixed expenses $300,000
=$3,540,000
Variable cost per unit=$120.
Therefore, number of units =$3,540,000/120
=29,500 units is the volume at which the firm would be indifferent to make or buy.
Answer for question no.4:
Break even point is the point at which the contribution is equal to fixed expenses.
Assuming $160 is the selling price, then contribution=$160-$120
=$40.
Breakeven in units=$300,000/$40.
=7500 units.
Particulars Make Buy Annual volume(1) 24000 24000 Variable cost per unit(2) 120 160 Total variable costs(3)=(1)*(2) 2880000 3840000 Total fixed costs(4) 300000 0 Annual cost (3)+(4) 3180000 3840000Related Questions
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