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 49,000 units. A supplier is able to supply the parts for $15.00 per piece. Green Machine estimates that it will cost $2120 to prepare the contract with the supplier. To make the parts in-house, Green Machine must invest $95,000 in capital equipment, they estimate it will cost $9.00 per piece to produce the part in-house. Carry all calculations out to two decimal places. What is the breakeven quantity? a. Less than or equal to 14,500 • b. Greater than 14,500 but less than or equal to 15,000 c. Greater than 15,000 but less than or equal to 15,500 d. Greater than 15,500 but less than or equal to 16,000 e. Greater than 16,000

Answer 1

Option (c) is correct.

Step-by-step explanation:

Given that,

Annual requirement = 49,000 units

Supplier is able to supply the parts = $15.00 per piece

Cost to prepare the contract = $2,120

Investment in capital equipment = $95,000

cost to produce the part in-house = $9.00 per piece

Break even quantity:

= Difference in Fixed costs ÷ Difference in variable cost per unit

= ($95,000 - $2,120) ÷ ($15 - $9)

= 15,480 units

i.e. Greater than 15,000 but less than 15,500.