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 25,000 units. A supplier is able to supply the parts for $12.25 per piece. Green Machine estimates that it will cost $700 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 $9.00 per piece to produce the part in-house. Carry all calculations out to two decimal places.

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

1. Greater than 30,000 but less than or equal to 35,000

2. Greater than $370,000 but less than or equal to $375,000

3. A) Buy the part.

4. A) Less than or equal to $20,000.

Step-by-step explanation:

Total cost = Fixed cost + (Variable costper unit * Volume

Let the volume be x

TC buy = 700 + 12.25x

TC make = 100,000 + 9.00x

TC buy = TC make

700 + 12.25x = 100,000 + 9.00x

12.25x - 9.00x = 100,000 - 700

3.25x = 99,300

x = 99,300 / 3.25

x = 30553.847

x = 30,554 units

The correct answer is "Greater than 30,000 but less than or equal to 35,000"

2. TC buy = 700 + 12.25x

TC buy = 700 + (12.25 * 30,554)

TC buy = $700 + $374,287

TC buy = $374,987

TC make = 100,000 + 9.00x

TC make = 100,000 + (9.00 * 30,554)

TC make = $100,000 + $274,986

TC make = $374,986.

The correct answer is "Greater than $370,000 but less than or equal to $375,000"

3. TC buy = 700 + 12.25x

TC buy = 700 + (12.25 * 25,000)

TC buy = $700 + $306,250

TC buy = $306,950

TC make = 100,000 + 9.00x

TC make = 100,000 + (9.00 * 25,000)

TC make = $100,000 + $225,000

TC make = $325,000.

Calculating cost in both the cases, we see that in 1st case it is $306950, which is less than making in-house. Thus, Option A, Buy the Part

4) Cost Savings = $100,000 + (9.00 * 25,000) - $700 - (12.25 * 25,000)

Cost Savings = $325,000 - $306,950

Cost Savings = $18,050

Thus, Option A since it less than or equal to $20000