At a cross-over (indifference) volume, the total cost from the making option bec

Question

At a cross-over (indifference) volume, the total cost from the making option becomes equal to that from the buying option.

Let B = The indifference volume

Given that,

Fm = Fixed Cost for making = $12,000
Fb = Fixed cost for buying = $2,400
cm = Variable cost for making = $1.5
cb = variable cost for buying = $2.0

So, Fm + cm x B = Fb + cb x B
or, B = (Fm - Fb) / (cb - cm) = (12000 - 2400)/(2.0 - 1.5) = 19,200

Any volume more than 19,200 i.e. in [19201,..), making is a better option. Any volume less than 19,300 i.e. in (.., 19199], buying is better.

Explanation / Answer

The manager of a local pub is considering adding a healthier option to the menu in the form of a veggie plate with hummus. There are two options with the price to the customers the same. The make in-house option is to buy local produce from a local farmer’s market and have the staff assemble the veggie plates. This would require some special prep space, equipment, etc. and a part-time prep cook would need to be hired. The pub manager estimates the fixed costs of this option at $12,000 and variable costs at $1.50 per veggie plate. The buy (or outsource) option is to contract with a local supplier and get preassembled veggie plates for $2 per plate. This however, would require a new refrigerator to hold the preassembled plates at an annual fixed cost of $2400.

At how many veggie plates sold does it still make sense to install the equipment and make the plates in house?

To get them from a supplier?

How many plates must be sold to make the manager indifferent across the make or buy options?

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