Question

Your firm can make a product in-house for $11.50 per unit using new production equipment which would cost $30,000. Your firm could alternatively purchase the same item for $16.25 per unit using a legal contract which will cost $2000 to create and negotiate. What is the approximate break-even point

Answer 1

The indifference point is 5,895 units

Step-by-step explanation:

Giving the following information:

In-house:

Unitary variable cost= $11.5

Fixed cost= 30,000

Buy:

Unitary variable cost= $16.25

Fixed cost= 2,000

To calculate the indifference point, we need to establish the total cost formulas for each option:

In-house:

Total cost= 30,000 + 11.5x

x= number of units

Buy:

Total cost= 2,000 + 16.25x

x= number of untis

Now, we equal both formulas and isolate x:

30,000 + 11.5x = 2,000 + 16.25x

28,000 = 4.75x

5,895 = x

The indifference point is 5,895 units