Chapter 5
9. You are given the following information:
Costs Make Option Buy Option
Fixed Cost $125,000 $5,000
Variable Cost $15 $17
a. Find the break-even quantity and the total cost at the break-even point.
b. If the requirement is 150,000 units, is it more cost-effective for the firm to buy or make
the components? What is the cost savings for choosing the cheaper option?
Anwer
a. Total cost to make = Total costs to buy
125,000. +15Q = 5,000 + 17Q
125,000 – 5,000 = 17Q – 15Q
120,000 = 2Q
Break-even quantity, Q = 60,000
Total cost = 125,000 + 15*60,000=1,025,000
b. The requirement is 150,000 units
Total costs to make = $125,000 + ($15 *150,000) = $2,375,000
Total costs to buy = $5,000 + ($17 *150,000) = $2,555,000
Cost difference = TC (buy) – TC ( make) = 2,55,000 – 2,375,000 = 180,000
The cost saving for choosing the cheaper option is the make components.
10. You are given the following information:
Costs Make Option Buy Option
Fixed Cost $25,000 $3,000
Variable Cost $8 $12
a. Find the break-even quantity and the total cost at the break-even point.
b. If the requirement is 4,500 units, is it more cost-effective for the firm to buy or make the
components? What is the cost savings for choosing the cheaper option?
c. If the requirement is 6,000 units, is it more cost-effective for the firm to buy or make the
components? What is the cost savings for choosing the cheaper option?
Anwer
a. Total cost to make = Total costs to buy
25,000. +8Q = 3,000 + 12Q
25,000 – 3,000 = 12Q – 8Q
22,000 = 4Q
Break-even quantity, Q = 5,500
Total cost = 25,000 + ( 8 * 5,500) = 69,000
b. The requirement is 4,500 units
Total costs to make = $25,000 + ($8 *4,500) = $61,000
Total costs to buy = $3,000 + ($12 *4,500) = $57,000
Cost difference = TC (buy) – TC ( make) = 57,000 – 61,000 = -4,000
The cost saving for choosing the cheaper option is the make components.
c. The requirement is 6,000 units
Total costs to make = $25,000 + ($8 *6,000) = $73,000
Total costs to buy = $3,000 + ($12 *6,000) = $ 75,000
The more cost effective for the firm is to make. The cost saving to make = 75,000 –
73,000 = 2,000
11. Ms. Sam, Purchasing Manager of Kuantan ATV, Inc., is negotiating a contract to buy 20,000
units of a common component part from a supplier. Ms. Kim has done a preliminary cost
analysis on manufacturing the part in-house and concluded that she would need to invest $50,000
in capital equipment and incur a variable cost of $25 per unit to manufacture the part in-house.
Assuming the total fixed cost to draft a contract with her supplier is $1,000, what is the
maximum purchase price that she should negotiate with her supplier? What other factors should
she negotiate with the suppliers?
Anwer
Number of unitl to buy = 25 unitl
Variable cost = $25
Capital investment = 20,000 * 25= 500,000$
Invest in capital equipment = 50,000$
Total fixed cost = 1,000$
Total costs = ( 50,000-1,000) + (25 * 20,000) = 550,000
550,000
Maximunn purchase price = = 27.5/ unit. Because at 0 she has a breakeven.
20,000
She could negotiate the delivery, payment terms or the quantity of the gooods, supplier’s
technology, financial stability, flexibility, etcetera.
12. A Las Vegas, Nevada, manufacturer has the option to make or buy one of its component
parts. The annual requirement is 20,000 units. A supplier is able to supply the parts for $10 each.
The firm estimates that it costs $600 to prepare the contract with the supplier. To make the parts
in-house, the firm must invest $50,000 in capital equipment and estimates that the parts cost $8
each.
a. Assuming that cost is the only criterion, use break-even analysis to determine whether the
firm should make or buy the item. What is the break-even quantity and what is the total
cost at the break-even point?
b. Calculate the total costs for both options at 20,000 units. What is the cost savings for
choosing the cheaper option?
Anwer
Costs Make Option Buy Option
Fixed Cost $50,000 $600
Variable Cost $8 $10
a. Total cost to make = Total costs to buy
50,000. +8Q = 600 + 10Q
50,000 – 600 = 10Q – 8Q
49,400 = 2Q
Break-even quantity, Q = 24,700
Total cost = 50,000 + (8 * 24,700) = 247,000
b. The requirement is 20,000 units
Total costs to make = $50,000 + ($8 *20,500) = $210,000
Total costs to buy = $600 + ($10 *20,000) = $200,600
Cost difference = TC (buy) – TC ( make) = 200,600 - 210,000 = -9,400
The cost saving for choosing the cheaper option is the make components.
