Please show all detailed work and provide excel solution. Problem 1 (15 points):

Question

Please show all detailed work and provide excel solution.

Problem 1 (15 points): A company soon will be producing and marketing a new model line of motors. The production manager is facing a make-or buy decision regarding the new motor to be installed. Based on the total cost involved, should the motors be produced internally or purchased from a vendor? Producing them internally would require an investment of $1 million in new equipment as well asa production cost of $1,600 for each motor produced. If purchased from a vendor instead, the price would be $2,000 per motor, plus a onetime $10,000 vendor registration fees. A preliminary forecast from the company's marketing division indicates that 3,000 motors will be sold. a) Analyze the manager's options, which one should he choose? Show your analysis If he sells each motor for $2,400, calculate the number of motors that must be sold to break even (using the best choice from part (a)) Suppose that the company decides to make the investment to produce the motors in-house and to also open a new sales office with 4 new people at an hourly rate of $14/hour to increase sales. Assuming that the new sales team will work 8 hours a day, 7 days a week and 30 days a month for 6 months and that the monthly rent for the new office is S10,000, calculate the average monthly number of motors that must be sold by the end of the six months before the company starts turning profit (You can assume that the value of money over time remains the constant, i.e., the interest rate is 0). b) c)

Explanation / Answer

(a)cost of in house production = fixed cost + variable cost =$ 10,00,000 +$ 1600.x (x is number of units to be produced and cost of producing is $1600/unit)

c(x) =$10,00,000 + $1600. x --------------------------(1)

now purchasing by vendor c(x) = $ 10,000 +$ 2000.x-----------------------------(2) (10,000 is fixed vendor registration fee ,and per unit cost is $ 2000)

now company has to purchase 3000 motors hence total cost in first case will be

c(30000) =$10,00,000 + $1600(3000) putting x=3000

= $10,00,000 + $48,00,000 = $ 58,00,000

in second case c(3000) = $10,000+ $2000 (3000) = $10,000 + $ 60,00,000

= $ 60,10,000

clearly in house production should be manager`s option giving total saving =$60,10,000 -$58,00,000

= $ 2,10,000

(b) Now if each motor company sells for $ 2400 hence revenue function is given as R(X) = $2400 x

now for breakeven point R(X) = C(X) i.e. $2400x = $10,00,000 + $1600x selecting best option

i.e. 2400x - 1600x = 10,00,000 or 800x = 10,00,000 or x = 10,00,000/800

= 1250 motors should be sold

(c) If company producing in house and a new sales office is established it will attract additional cost

= 4 people x $14/hr(hourly rate) x 8 hours/day x 30 days (a month) x 6 month

= $80,640 rent for 6 month = $10,000 x 6 = $60,000

hence total cost = $ 80,640+$60,000 =$1,40,640

now c(x) = $10,00,000 +$ 1600x + $1,40,640 , R(x) = $ 2400

hence break even point now is $ 2400 = $ 11,40,640 + $ 1600 x

or 2400x-1600x = 11,40,640 or 800 x = 11,40,640 or x= 11,40,640/800

= 1425.8 i.e 1426 in 6 month

hence average sale/ month = 1426/6 = 237.67 i.e 238/month so that profit after 6 month start

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