Question

You have two alternatives to consider to produce a part. The first alternative requires an initial investment of $50,000, production costs are $30 per part and they can be sold for $50. The second alternative is that you can buy the part externally for $40 and they still sell for $50.a. Make and explain your recommendation for these two alternatives showing your calculations and the graph you would show to management.b. What are two make-buy issues of which management should be aware?

Answer 1

At 5,000 both option has the same cost.

Below that volume is better to but

and above this, produce the part generates a cost savings.

Step-by-step explanation:

there is a point of indifference at which potal cost for both option is the same.

50,000 + 30X = 40X

X = 50,000 / 10 = 5,000

At this pouint the total cost is the same for both alternatives

Therefore the company will have to check for which is their relevant range

in order to decide whether to produce or buy the part.