A firm plans to begin production of a new small appliance. The manager must deci

Question

A firm plans to begin production of a new small appliance. The manager must decide whether to purchase the motors for the appliance from a vendor at $9 each or to produce them in-house. Either of two processes could be used for in-house production; Process A would have an annual fixed cost of $180,000 and a variable cost of $7 per unit, and Process B would have an annual fixed cost of $195,000 and a variable cost of $6 per unit. Determine the range of annual volume for which each of the alternatives would be best.

Explanation / Answer

for the process the volume should be:

they should produce atleast 90,000 units. then the total costs becomes as

= 180,000+ (90,000*$7)= 180,000+630,000= $810,000

in the second process:

195,000+(90,000*6)= 195,000+540,000= $735,000

so, going with the option B is correct to minimise the cost if the quantity is 90,000 or more than it.

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