Question

A company consumes a product in its manufacturing operations. It has the following three options. Buy Option: It can buy the product for $230.00 per unit from another company. Make-option 1: It can make the product at a (variable) cost of $170.00 per unit (including all materials) on a standard machine. Further, the standard machine costs $53,400. Make-option 2: It can make the product at a (variable) cost of $120.00 per unit (including all materials) on an advanced machine. Further, the advanced machine costs $116,900.

What is the the switch-over point (i.e., point of intersection) from buy-option to make-option 1 ?

Answer 1

The switch-over point from buying the product to making it on the standard machine occurs when the company needs more than 890 units.

Step-by-step explanation:

The student is asking to calculate the switch-over point or the point of intersection between the buy option and make-option 1 in a company's manufacturing operations. To find the switch-over point, we must compare the total cost of buying versus making the product on a standard machine. The cost of buying is a constant $230 per unit. The total cost of making the product includes both the variable cost of $170 per unit and the fixed cost of the standard machine, which is $53,400. The switch-over point occurs where the total costs of both options are equal. Therefore, we need to solve for the number of units (Q) where:

230Q = 170Q + 53,400

By rearranging the equation and solving for Q, we get:

60Q = 53,400

Q = 890

Thus, the company should switch from buying the product to making it on the standard machine when it requires more than 890 units.