c. At what level of client usage would the two alternatives produce the same pro

Question

c. At what level of client usage would the two alternatives produce the same profit? 9. A firm plans to begin production of a new appliance. The manager must decide whether to purchase the motors for the appliance from a vendor to be sold at $7 each or to produce them in-house. Either of the two processes could be used for production. Purchasing the motor from a vendor would have an annual fixed cost of $160,000 and variable cost of $5 per unit, while the in-house production would have an annual fixed cost of $190,000 and a variable cost of $4 per unit. a. What is the break-even point if we use an outside vendor? b. What is the break-even point if we produce the motor in-house? c. Determine the range of annual volume for which each alternative would be the best.

Explanation / Answer

a) Purchasing from outside vendor

Fixed Cost = 160000 $

Variable Cost per unit = 5 $

Selling Price per unit = 7 $

Breakeven point (in units) = FC/(SP-VC) = 160000/(7-5) = 80000 units

b) Producing in-house

Fixed Cost = 190000 $

Variable Cost per unit = 4 $

Selling Price per unit = 7 $

Breakeven point (in units) = FC/(SP-VC) = 190000/(7-4) = 63334 units

c) 160000+x*5 = 190000+x*4 => x = 30000 units

Purchasing from vendor is recommended till 30000 units

Above 30000 units, making the product inhouse is recommended.

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