Question

In: Operations Management

ABC’s production line of the Widget gadget has a fixed cost of $200,000 and the variable...

ABC’s production line of the Widget gadget has a fixed cost of $200,000 and the variable cost is $5 per unit.

a) If the company sells the first 9,000 units at a price of $20 and then sells all additional units at $17 per unit, what is the break-even point?        

b) Suppose that the company is considering outsourcing this to DEF company. If so, it will save the fixed and variable costs per unit. If the cost of outsourcing is $12 per unit, over what range would each of the production options (in-house and outsourcing) be preferred? Assume that the price per unit will remain the same whether it produces the product internally or outsources it.

c) Johndoe Company is interested in buying the Widget gadget from ABC. Johndoe Company is open to letting ABC manufacture them in-house or outsource them under certain conditions. Johndoe will only buy the outsourced if ABC reduces the selling price to $18 per unit. Also, if ABC does outsource this, Johndoe will only buy 8,000 units. On the other hand, if ABC produces the product internally, Johndoe will be willing to pay $20 per unit for all the products and Johndoe will buy 12,000 widgits. Economically, which option (produce internally or outsource) is better for ABC?   

Solutions

Expert Solution

Given: Fixed Cost FC = $200,000

Variable cost = VC = $5

Selling price for 1st 9000 units = $20 per unit

Total Revenue for First 9000 units = $20 * 9000 = 180,000

Since this revenue < Fixed cost + Variable cost for 9000 units, we have to produce more units

Hence, for additional x units for breakeven,

Total cost = Total Revenue

FC + VC * (9000 + x) = $20 * 9000 + x * $17

200,000 + 5* (9000 + x) = 180,000 + 17x

245000 + 5x = 180000 + 17x

x = 5,416.67

Hence, total no. of units required = 9000 + 5416.67 = 14,416.67 = 14417 units

Breakeven units = 14,417 units

b) At crossover point, total cost for y unit for producing in-house = Total cost for outsourcing

FC + VC * y = Cost of outsourcing * y

200,000 + 5 * y = 12 * y

y = 28,571.43 = 28,571

Higher range is considered for higher fixed cost

Hence, for a range less than 28571 units, the outsourcing option is considered. For range more than 28571 units, in-house production is considered.

c) Total revenue for outsourcing option = $18 * 8000 units = $144,000

Total cost for outsourcing = $12*8000 = $96,000

Total Profit for outsourcing = 144000 - 96000 = $48,000

Total revenue for in-house production = $20 * 12000 = $240,000

Total cost for in-house production = FC + VC * 12000 = 200,000 + 5*12000 = 260,000

Total profit = 240,000 - 260,000 = $ (-20,000)

Since outsourcing has a profit and in-house production has a loss, the Outsourcing option is preferred.

-----------------------------------------------------------------------------------------------------------------------

In case of any doubt, please ask through the comment section before Upvote/downvote.


Related Solutions

CBA’s production line of the Widget gadget has a fixed cost of $200,000 and the variable...
CBA’s production line of the Widget gadget has a fixed cost of $200,000 and the variable cost is $5 per unit. a) If the company sells the first 10,000 units at a price of $20 and then sells all additional units at $15 per unit, what is the break-even point? b) Suppose that the company is considering outsourcing this to FED company. If so, it will save the fixed and variable costs per unit. If the cost of outsourcing is...
Assume that a radiologist group practice has the following cost structure: Fixed costs $200,000 Variable cost...
Assume that a radiologist group practice has the following cost structure: Fixed costs $200,000 Variable cost per procedure $200 Charge (price) per procedure $400 a. What is the group’s breakeven point in volume? b. Complete the following table. (Hint: total costs= fixed costs + (variable cost per procedure x procedures) Volume (Procedures) Fixed Costs Total Costs Total Revenue 0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 c. Sketch out a breakeven graph...
Suppose the fixed costs at a widget factory are $500.00 and variable costs per widget are...
Suppose the fixed costs at a widget factory are $500.00 and variable costs per widget are as indicated. Compute the total average costs for each of the following: 1. Producing 10 widgets when the variable cost is $10 per widget Total Cost = $ _________ Average Cost = $ _________ 2. Producing 20 widgets when the variable cost is $15 per widget Total Cost = $ _________ Average Cost = $ _________ 3. Producing 100 widgets when the variable cost...
Production cost, fixed cost, average variable cost, product output
Use the following data table to answer questions a,b,c,d, and d. Answer the next question(s) on the basis of the following cost data for a purely competitive seller:                a. what are the above data for? b.How much are average fixed cost, average variable cost, and average total cost at 5 units of output? c.  How much is the marginal cost of the fifth unit of output? d. How many products will the firm...
Company A is considering replacing its current production line. The current line has fixed cost 350,000...
Company A is considering replacing its current production line. The current line has fixed cost 350,000 per year, has variable cost 10 per unit and sells for 14 per unit. The new production line will have fixed cost of 500,000, variable cost of 9.6 per unit and sells for 16 per unit. 1. Determine the breakeven quantities for both lines. 2. Plot the two profit relations. 3. Determine the breakeven quantity between the two alternatives. Must be completed in Microsoft...
The fixed cost to restart production is $104,400 per model. Once production starts the variable cost...
The fixed cost to restart production is $104,400 per model. Once production starts the variable cost to make each vehicle is $272.50 per vehicle. The firm’s management is trying to decide if the firm should only concentrate on the domestic (Canadian) market (Estimated 745 of vehicles) or pursue export opportunities (Estimated combined 11710 of vehicles) Calculate the total cost per vehicle for the two (2) options. Which of the two (2) options do you recommend? Why?
If a firm has a total fixed cost of $75 and an average variable cost of...
If a firm has a total fixed cost of $75 and an average variable cost of $35 for producing 10 units of output, the average total cost would be: If a firm has an average total cost of $55 and an average fixed cost of $10 for producing 5 units of output, then the total variable cost will be:
a) Find ABC’s average fixed costs, average variable costs, average total costs and marginal costs.
Quantity Total Fixed Cost Total Variable Cost 0 100 0 1 100 50 2 100 70 3 100 90 4 100 140 5 100 200 6 100 360 a) Find ABC’s average fixed costs, average variable costs, average total costs and marginal costs. b) Since ABC is charging the customers at the price of $50, it seems that the company cannot make a profit. The owner decides to shut down operations. What are ABC’s profits/losses? Should the owner shut down...
quantity of broomsticks fixed cost variable cost total cost average fixed cost average variable cost average...
quantity of broomsticks fixed cost variable cost total cost average fixed cost average variable cost average total cost marginal cost marginal product 0 10 $13 $38 22 $28 32 $70 41 $64 50 $110 59 $108 65 $133 70 $185 how do I fill in the blanks? as well as graph the three average cost curves and the marginal cost curve.
Variable and Fixed Cost Behavior
Munchak Company’s relevant range of production is between 9,000 and 11,000 units. Last month the company produced 10,000 units. Its total manufacturing cost per unit produced was $70. At this level of activity the company’s variable manufacturing costs are 40% of its total manufacturing costs.Required:Assume that next month Munchak produces 10,050 units and that its cost behavior patterns remain unchanged. Label each of the following statements as true or false with respect to next month. Do not use a calculator...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT