Question

We need to make a decision whether to make a certain product or buy it from somewhere else. To produce the product, we need to spend 1,200,000 ISK as initial costs. and the variable cost of producing it yourself is ISK 5/pc. If we choose to buy the product from somewhere else, the product costs ISK 8/piece.

a) Calculate for a quantity of 700,000 pcs: is it more economical to make the product yourself or, on the other hand, to buy the product in?
b) What is the zero point, i.e. at what quantity does it not matter if we make it ourselves or buy in?

Answer 1

To produce the product, you need to consider the initial costs and the variable cost per piece. For a quantity of 700,000 pieces, it is more economical to make the product yourself. The zero point, where it does not matter if you make it yourself or buy it, is at a quantity of 400,000 pieces.

Step-by-step explanation:

To determine whether it is more economical to make the product yourself or buy it from somewhere else, we need to compare the total costs of each option.

For producing the product yourself, the total cost would be the sum of the initial costs and the variable cost per piece multiplied by the quantity. So, for a quantity of 700,000 pieces, the total cost would be: 1,200,000 + (5 * 700,000) = 4,700,000 ISK.

For buying the product from somewhere else, the total cost would be the cost per piece multiplied by the quantity. So, for a quantity of 700,000 pieces, the total cost would be: 8 * 700,000 = 5,600,000 ISK.

Therefore, it is more economical to make the product yourself as the total cost is lower compared to buying it from somewhere else.

To find the zero point, where it does not matter if we make it ourselves or buy in, we need to set the total costs of both options equal to each other and solve for the quantity. Using the same formula as before, the equation would be: 1,200,000 + (5 * quantity) = 8 * quantity. Simplifying this equation, we get: quantity = 1,200,000 / 3 = 400,000 pieces.