You currently make a part on old equipment at a cost of $50,000 per year and a v

Question

You currently make a part on old equipment at a cost of $50,000 per year and a variable cost of $20/unit. You have found an outside supplier who will make the part for $15/ unit if you will pay their annual fixed costs of $200,000/year. The following table summarizes the details of this make versus buy decision. ALTERNATIVE Buy Make FIXED COST VARIABLE COST $15 per unit $50,000 per year $20 per unit $200,000 per year Suppose now that there is a second outside supplier. This supplier asks a fixed cost of $170,000 per year, but is willing to negotiate about the variable cost. What variable cost level would entail that this second supplier is never going to be the best option? O A. $20 per unit. O B. $18 per unit. O C. $16 per unit O D. $14 per unit.

Explanation / Answer

The breakeven point for Buy and Make option is:

Let us take at x units total cost is same

200,000 + 15*x = 50,000 + 20*x

x = 30,000

Till 30,000 units Make is the best option

The total cost for 30,000 is: 200,000 + 15*30,000 = 650,000

The variable cost for new supplier = (650000-170000)/30000 = 16$

Let us assume 18 $ as rate of new supplier, break even for new and old supplier is:

200,000 + 15*x = 170,000 + 18*x

x = 10,000 units (For this units, Make is best)

Let us assume 16 $ as rate of new supplier, break even for new and old supplier is:

200,000 + 15*x = 170,000 + 16*x

x = 30,000 units (For this units, Make is best)

Let us assume 20 $ as rate of new supplier, break even for new and old supplier is:

200,000 + 15*x = 170,000 + 20*x

x = 6,000 units (For this units, Make is best)

Hence, Ans A (20$)

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