Zodiac Furniture is considering the production of a new line of metal office cha
ID: 459881 • Letter: Z
Question
Zodiac Furniture is considering the production of a new line of metal office chairs. The chairs can be produced in-house using either process A or process B. The chairs can also be purchased from an outside supplier. Specify the levels of demand for each processing alternative given the costs in the table. (Calculate the following demand ranges. If a field should be blank enter 0. If a range goes to infinity enter "infinity". All boxes must be filled.)
Fixed Cost Variable Cost Process A $21,000 $26 Process B $28,000 $17 Outside Supplier $0 $53Explanation / Answer
There are three options available, namely Process A, Process B and Outside Supplier.
The total cost functions under the alternatives are :
Process A 21000 + 26 * X ; Process B 28000 + 17 * X and Outside Supplier 53 * X where X represents number of units.
The Break Even Point (BEP) between Outside supplier (least fixed cost) and Process A (having fixed cost more than Outside but less than Process B) is obtained by solving: 21000+26X = 53X that means X =21000/27 (777.77)
Therefore in case the quantity required is less than or equal to 777 it is better to have Outside Supplier and for 778 or more Process A is preferred over Outside Supplier.
On the similiar lines for BEP between Process A and Process B we have to solve: 21000+26X = 28000+17X
Again we get the value of X as 777.77 means Process B is prefered over Process A for X having the values 778 or more.
Therefore the final conclusion is to go far Outside Supplier as long as X is less than or equal to 777 otherwise use Process B as per the calculations given below.
Fixed Cost Variable Cost Total Cost for X=0 Total Cost for X=777 Total Cost for X=778 Process A $21,000 $26 21000 41202 41228 Process B $28,000 $17 28000 41209 41226 Outside Supplier $0 $53 0 41181 41234Related Questions
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