5. A company is trying to decide whether to buy a product it uses or to produce

Question

5. A company is trying to decide whether to buy a product it uses or to produce the product itself. It expects to need 80,000 units per year and has collected the following cost information for three options:

Buy                 Produce                     Produce

Product          Manually                   Automated

                        Fixed Cost                    NA              $225,000                   $350,000

                        Variable Cost            $30/unit         $20/unit                     $18/unit

            What should the company do? Show any calculations made to decide.

Explanation / Answer

Total cost in buying product:= 30*80000

= $2,400,000

Total cost in Producing manually= 225000+ 20*80000

=$1,825,000

Total cost in producing automated = 350000+ 18*80000

= $1,790,000

Cost is minimum in producing the automated product. therefore company produce automated product.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.