Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 35

Make or Buy; Continuation of Problem 9-28 (Chapter 9) Calista Company manufactures electronic equipment In 2009, it purchased the special switches used in each of its products from an outside supplier. The supplier charged Calista $2 per switch. Calista’s CEO considered purchasing either machine X or machine Y so the company could manufacture its own switches. The CEO decided at the beginning of 2010 to purchase Machine X, based on the following data:

	Machine X	Machine Y
Annual fixed cost	$135,000	$204,000
Variable cost per switch	0.65	0.30

Required

1. For machine X, what is the indifference point between purchasing the machine and purchasing from the outside vendor?

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2. At what volume level should Calista consider purchasing Machine Y?

Step 1 of 2

1.?The answer is zero. In contrast to 9-28, for which Machine X was a relevant cost (had not been purchased yet), the proper analysis was to compare the cost of purchasing machine X versus the cost of purchasing from the outside vendor. The analysis was as follows, showing that Calista should purchase machine X if volume is expected to exceed 100,000 units.:

?????Machine X??

??$2Q = $.65Q + $135,000

???Q = 100,000

The answer is different for 11-34 since the cost of machine X is now a sunk cost, and thus,  the unit cost of $ 0.65 is always preferred to the outside price of $2, irrespective of the volume, even for very low volume levels.