Question

Insourcing incurs an annual fixed cost of $500,000 and a variable cost of $60 per unit. Outsourcing incurs an annual fixed cost of $750,000 and a variable cost of $20 per unit. What is the indifference point between the two alternatives

Answer 1

The indifference point is 6,250 units

Step-by-step explanation:

First, we need to structure the total cost formulas:

Insourcing:

Total cost= 500,000 + 60*x

x= number of untis

Outsourcing:

Total cost= 750,000 + 20*x

x= number of units

Now, we equal both formulas and isolate x:

500,000 + 60x = 750,000 + 20x

40x = 250,000

x= 6,250

The indifference point is 6,250 units

Prove:

Total cost= 500,000 + 60*6,250= $875,000

Total cost= 750,000 + 20*6,250= $875,000