You are given the following information Make OPtion Fixed co

You are given the following information: Make OPtion: Fixed cost: $125000, Variable Cost: $15 Buy Option: Fixed Cost: $5000, Variable Cost $17. A. Find the break even quantity and the total cost at the break even point. B. If the requirement is 150,000 units, is it more cost- effective for the firm to buy or make the components? What is the cost savings for choosing the cheaper option?

Solution

Solution:

Total cost to make (15000 units) = FC +( VC per unit * No of Units)

=$125000 + ($15 *150000) = $2375000

Total cost to buy (15000 units) = FC +( VC per unit * No of Units)

=$ 5000 + ($75 *150000) = $2555000

Break Even Quantity:

The Break even quantity(Q) = FC + total VC of buy = FC + Total VC of Make

=$ 5000 + 17*Q = $ 125000 + 15*Q

=>2Q = 120000

Hence Q =60000 unit

Total Cost at Break Even Point:     

$ 125000 + $ 15*60000 = $ 5000 + 17*60000 = $ 1025000

The requirement is 150000 units

So it is ideal to make the product rather buying the same because the making decision is cheaper/cost effective one

If you make the product ,you can save the cost $ 2555000 -$ 2375000 = $ 180000