Question

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?

Answer 1

For the manufacturer to decide on expansion, the break-even point must be calculated. At an expected demand of 0.6 million units, it is beneficial for them to produce the keyboards internally as the demand exceeds the break-even point of 320,000 units.

Step-by-step explanation:

The manufacturer is faced with a decision to either produce keyboards internally at an estimated production cost of $35 each, or to purchase them from an outside supplier at a cost of $50 each, considering an upfront investment of $8 million for plant expansion and equipment. To determine whether the expansion should be undertaken, one must calculate the break-even point where the total cost of internal production equals the cost of purchasing from the supplier. Assuming the fixed cost for expansion is $8 million, the internal unit cost is $35, and the supplier's unit cost is $50, we calculate the break-even point by setting up the equation: $8 million + ($35 × quantity) = $50 × quantity. Solving for 'quantity' gives us a break-even point at 0.32 million units. Therefore, the internal production becomes viable for any demand above 320,000 units. With an expected demand of 0.6 million units, the manufacturer should undertake the expansion as it is above the break-even quantity.