Question

Hoboken Industries currently manufactures 34,000 units of part MR24 each month for use in production of several of its products. The facilities now used to produce part MR24 have a fixed monthly cost of $170,000 and a capacity to produce 86,000 units per month. If the company were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40 percent of their present amount. The variable production costs of part MR24 are $15 per unit.

2. If Hoboken Industries is able to obtain part MR24 from an outside supplier at a unit purchase price of $16, what is the monthly usage at which it will be indifferent between purchasing and making part MR24?

Answer 1

we shall find the monhly usages by equating two alternatives

Alternative: Buy

Fixed cost = $170,000*40%

=$68,000

suppose the usage is X

Total Purchase cost + Fixed cost (Buy)= Total Variable cost of production+ Fixed cost (Make)

$16X + $68,000 =$15X +$170,000

$16X-$15X=$170,000-68,000

X=102,000

At 102,000 units monthly usage , it will be indifferent between purchasing and making part MR24