We are producing widgets with a fixed cost of 50k Euro and a unit cost of 5 Euro

Question

We are producing widgets with a fixed cost of 50k Euro and a unit cost of 5 Euro. We sell them for 25 Euro. Draw this situation and calculate the break even point 2. Calculate the switch over point We are producing the same widgets as in the previous example. We got an offer from a producer to make the widgets for us. This reduces our fixed costs to 15k Euro and they sell us the widgets for 7.5 Euro per piece. Up to what amount, will this be interesting tor us? From what amount will it be better to produce ourselves?

Explanation / Answer

Current:

Fixed cost = 50K

Variable cost = 5 per unit

Selling Price = 25

Margin = 25-5 = 20 per unit

So

Break even = 50K /20 = 50000/20 = 2500 units

Case 2:

Fixed cost = 15K

Variable cost = 7.5 per unit

Selling Price = 25

Margin = 25-7.5 = 17.5 per unit

So

Break even = 15K /17.5 = 15000/17.5 = 857.14 units

So from 858 to 2500 units its better to outsource and above 2500 its better to produce as the margin is 20 instead of 17.5

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