Question

Fixed Cost $80,000 $10,000 Variable Cost $9 $16.Find the break-even quantity and the total cost at the break-even point.If the requirement is 9,000 units, is it more cost-effective for the firm to buy or make the components.

Answer 1

Part a: The quantity of units for break even is 10,000 units and the total cost at break even is $170,000.

Part b: The Total Buy cost for 9000 units is $154,000 which is less than the total make cost of $161,000 so, it is more cost effective for the firm to buy the units.

Step-by-step explanation:

Part 1

From the data, for a quantity Q

For Make Option:

Fixed Cost=$80000

Variable Cost=$9

Total Make Cost is $80000+$9Q

For Buy Option:

Fixed Cost=$10000

Variable Cost=$16

Total Buy Cost is $10000+$16Q

At Break even point

Total Buy Cost=Total Make Cost

$10000+$16Q=$80000+$9Q

$16Q-$9Q=$80000-$10000

Q(16-9)=70000

7Q=70000

Q=10000

So the quantity of units for break even is 10,000 units.

The cost at break even is given as

Total Cost=$80000+$9(10,000)=$80000+$90000=$170000

So the total cost at break even is $170,000.

Part b

For 9000 units the Make Cost is given as

Total Make Cost is $80000+$9Q

Total Make Cost is $80000+$9(9000)

Total Make Cost is $80000+$81000

Total Make Cost is $161000.

So the Total Make Cost is $161000.

For 9000 units the Buy Cost is given as

Total Buy Cost is $10000+$16Q

Total Buy Cost is $10000+$16(9000)

Total Buy Cost is $10000+$144000

Total Buy Cost is $154000

So the Total Buy Cost is $154000.

As the Total Buy cost for 9000 units is $154,000 which is less than the total make cost of $161,000 so, it is more cost effective for the firm to buy the units.