Question

You currently purchase a part used in your production process from an outside supplier, and have decided to begin making this part in-house. You have two equipment options for moving production in-house: special-purpose equipment and general-purpose equipment. Cost information for these two options is as follows:

ALTERNATIVE
Special-Purpose Equipment
General-Purpose Equipment FIXED COST
$200,000 per year
$50,000 per ye ar VARIABLE COST
$15 per unit
$20 per unit
Use Scenario 2.6 to solve this mystery. At an annual requirement of 40,000 units, what does the company save per year by selecting the low-cost option?
a) $40,000
b) $50,000
c) $150,000
d) $300,000

Answer 1

At an annual requirement of 40,000 units, selecting the low-cost option will save the company per year:

b) $50,000

Step-by-step explanation:

a) Data and Calculations:

ALTERNATIVE FIXED COST VARIABLE COST

Special-Purpose Equipment $200,000 per year $15 per unit

General-Purpose Equipment $50,000 per year $20 per unit

Total Cost of Production for 40,000 units under the two alternatives:

ALTERNATIVE FIXED COST VARIABLE COST TOTAL COSTS

Special-Purpose $200,000 $600,000 ($15*40,000) $800,000

General-Purpose $50,000 $800,000 ($20*40,000) $850,000

b) The difference between the two alternatives in total costs is $50,000 ($850,000 - $800,000) with the low-cost alternative as the Special-Purpose Equipment.