Question

The Green Machine Manufacturing Company has the option to make or buy a component part for one of its lawnmowers. The annual requirement is 15,000 units. A supplier is able to supply the parts for $17.25 per piece. Green Machine estimates that it will cost $2,100 to prepare the contract with the supplier. To make the parts in-house, Green Machine must invest $100,000 in capital equipment. They estimate it will cost $11.00 per piece to produce the part in-house.

1) What is the breakeven quantity?
A) Less than or equal to 30,000
B) Greater than 30,000 but less than or equal to 35,000
C) Greater than 35000 but less than or equal to 40,000
D) Greater than 40,000 but less than or equal to 45,000
E) Greater than 45,000
2) What is the total cost at the breakeven point?
A) Less than or equal to $365,000
B) Greater than $365,000 but less than or equal to $370,000
C) Greater than $370,000 but less than or equal to $375,000
D) Greater than $375,000
3) If the demand is 25,000 units, should Green Machine make or buy the part?
A) Buy the part
B) Make the part
C) Both
D) Neither
E) Not enough information
4) What is the cost savings from making the correct decision?
A) Less than or equal to $20,000
B) Greater than $20,000 but less than or equal to $25,000
C) Greater than $25,000 but less than or equal to $30,000
D) Greater than $30,000 but less than or equal to $35,000
E) Greater than $35,000

Answer 1

A) Less than or equal to 30,000

A) Less than or equal to $365,000

B) Make the part

E) Greater than $35,000

Step-by-step explanation:

Capital equipment cost = $100000

Annual requirement = 15000

Supply cost per piece = $17.25

In-house production cost per piece = $11

Contract preparation cost = $2100

If quantity at beatk even = x

In-house production = purchase cost

100000 + 11x = 2100 + 17.25x

100000 - 2100 = 17.25x - 11x

97900 = 6.25x

x = break-even quantity = 15664

Cost at breakeven:

100000 + 11(15664)

= 272,304

If demand = 25000 units:

In-house production :

100000 + 11(25000) = 375000

Purchase cost:

2100 + 17.25(25000)

2100 + 431250 = $433,350

The correct decision is to make the part, it is cheaper

Amount saved:

$433,350 - $375,000 = $58,350