Final answer:
The student's question involves determining the crossover point for economies of scale related to in-house production versus external purchasing of a gear assembly, using the concept illustrated in Figure 7.9 where increased production leads to decreased average costs.
Step-by-step explanation:
The student's question pertains to the concept of economies of scale and the decision-making process of whether a company should produce an item in-house or purchase it from an external supplier. Economies of scale are realized when increased levels of production lead to lower average costs. In the example provided, as the quantity of gear assemblies produced increases, the average cost per unit decreases. This is similar to the illustrated Figure 7.9, which demonstrates economies of scale with the average cost of producing an alarm clock falling as the quantity of output rises. The figure shows three different sizes of factories—small (S), medium (M), and large (L)—each with a different output level (1,000, 2,000, and 5,000 respectively) and an average cost per alarm clock ($12, $8, $4 respectively). The crossover point must be calculated to determine where the total cost of in-house production is equal to the cost of purchasing from the external supplier. For Stan Fawcett's company, this decision involves comparing the setup costs and per-unit costs of in-house production with the cost of purchasing from Salt Lake Supply, Inc.