Question

In: Finance

What should the company do regarding this product, purchase, produce semi-automated or produce fully automated?

A company has the following product information:

Buy Product Produce Semi-Automated Produce Fully Automated

Fixed cost ------- $150,000 $200,000

Variable cost $20.00 $18.00 $15.00

What should the company do regarding this product, purchase, produce semi-automated or produce fully automated?
At what volume would the company be indifferent to buying the product or producing it semi-automated?

Expert Solution

(A) The decision of the company would depend on the number of products that the company wants to produce.

Comparing BUY product and Semi Automated :

Semiautomated has a fixed cost of $150,000. Also, the variable cost if $2 less than buy product.

No. of product needed to break even = $150,000 / $2 = 75,000 units.

Thus, if the need is of less than 75,000 units the company should produce. If more they shoul semi automate.

Similarly comparing BUY vs Full automated

= Fixed cost / difference in variable cost = $200,000 / $5 = 40,000 units

Thus, if the total producton is below 40,000 units the company should buy and if more than that they should fully automate.

Decision summary :

Between 0 to 40,000 ---------------------- Buy Product

Above 40,000 ------------------------------- Produce Fully automated.

Semiautomated production shall not be used.

(B) as calculated above, they would be indifferent at 75,000 units.

jeff jeffy answered 2 years ago

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