Question

a large international computer manufacturer is designing a new model of personal computer. it estimates that the cost to produce one unit will be around $700 and it can sell a unit for $800. it estimates that the capacity setup for this model will cost $15 million. a) how many units will it need to sell to justify the capacity cost? b) the manufacturer must decide whether to produce the keyboards internally or to purchase from an outside supplier. the supplier is willing to sell the keyboards for $50 each, but the manufacturer estimates that it can internally produce the keyboards for $35 each. management estimates that expanding the current plant and purchasing the necessary equipment to make the keyboards would cost $8 million. above what demand quantity the expansion should be considered? should they undertake the expansion if the expected demand is 0.6 million units? c) the manufacturer decides to produce the keyboards internally for a better production control. the manufacturer is now evaluating two options for expansion: a) expansion based on ordinary production equipment at the cost of $8 million; and b) expansion based on modern production equipment that will cost $10 million. through option a, the keyboard production will cost $35 per unit. production per unit will be $30 with option b. for what ranges of demand quantity each option is better?

Answer 1

a) The manufacturer needs to sell 150,000 units to justify the capacity cost. b) The expansion should be considered above 400,000 units of demand. c) Option a is better for demand quantities below 1,600,000 units, while option b is better for quantities above 1,600,000 units.

Step-by-step explanation:

a) To justify the capacity cost of $15 million, the computer manufacturer will need to sell enough units to cover the cost. The cost to produce one unit is $700 and the selling price is $800. Therefore, the profit per unit is $800 - $700 = $100. To cover the $15 million cost, the manufacturer will need to sell $15,000,000 / $100 = 150,000 units.

b) To decide whether to produce the keyboards internally or purchase from an outside supplier, the manufacturer needs to compare the costs. The supplier sells keyboards for $50 each, while the manufacturer estimates a production cost of $35 each. The expansion cost to produce the keyboards internally is $8 million. The manufacturer should undertake the expansion if the expected demand is above $8,000,000 / ($50 - $35) = 400,000 units.

c) Comparing the two expansion options for keyboard production, option a has a production cost of $35 per unit while option b has a cost of $30 per unit. Option a is better when the demand quantity is less than $8,000,000 / ($35 - $30) = 1,600,000 units. Option b is better when the demand quantity is above 1,600,000 units.