Question

A firm is evaluating the alternative of manufacturing a part that is currently being outsourced from a supplier. The relevant information is provided below:

For in-house manufacturing:

Annual fixed cost

=

$75,000

Variable cost per part

=

$140

For purchasing from supplier:

Purchase price per part

=

$150

Using this information, find the best decision if the demand is 6,500 parts. Round your answers to the nearest dollar.

Total cost of production: $   
Total cost of outsourcing: $  

The best decision is to -Select-manufacture in-houseoutsourceItem 3 .

Determine the break-even quantity at which the firm would be indifferent between manufacturing the part in-house or outsourcing it. Round your answer to the nearest whole number.

parts=_______?

Answer 1

For-Manufacturing		Annual Fixed Cost	$75,000
		Variable cost per unit	$140
		No. of units	6,500
		Total Cost of Production	$985,000
For-Outsourcing		Purchase price per unit	$150
		No. of units	6,500
		Total Cost of Outsourcing	$975,000

The best decision is to -Select outsource

For BEQ (break-even quantity)

Working Formula =

Total-Cost of Outsourcing – Cost-Per Unit of Manufacturing * X = 0 (* = multiply operation)

Calculation of Cost-Per Unit of Manufacturing

= (Total Cost of Production) /6,500

= $151.54

Putting all the value in working formula, we get,

$975,000 - $151.54 * X = 0 [Here, X = Parts]

Or

$975,000 = $151.54 * X

After solving above equation we, get

X = 6434.01

Parts = 6434