Use the following information to answer the questions below.
You currently make a part for old equipment at a cost of $20 / unit. The annual fixed cost for this equipment is $50,000. You have found an outside supplier who will make the part for $15 / unit if you will pay their annual fixed costs of $200,000 / year (see table).

-Refer to the instruction above. For what range of output would you prefer to make?
A) 30,000 or more units per year
B) 0 - 30,000 units per year
C) 0 - 40,000 units per year
D) 40,000 or more units per year

Question

Use the following information to answer the questions below.
You currently make a part for old equipment at a cost of $20 / unit. The annual fixed cost for this equipment is $50,000. You have found an outside supplier who will make the part for $15 / unit if you will pay their annual fixed costs of $200,000 / year (see table).
 
-Refer to the instruction above. For what range of output would you prefer to make?
A) 30,000 or more units per year 
B) 0 - 30,000 units per year 
C) 0 - 40,000 units per year 
D) 40,000 or more units per year

Quizplus · Accepted Answer

To determine the range, we need to compare the total costs of producing in-house versus outsourcing. For producing in-house:
Total cost = (Unit cost x Output) + Fixed cost = (20 x Output) + 50,000
For outsourcing:
Total cost = (Unit cost x Output) + Fixed cost = (15 x Output) + 200,000
To find the break-even point, we set the two equations equal to each other and solve for Output.
20x + 50,000 = 15x + 200,000
5x = 150,000
x = 30,000
Therefore, for output less than 30,000 units per year, it's more cost-effective to produce in-house. For output greater than 30,000 units per year, it's more cost-effective to outsource.

Use the Following Information to Answer the Questions Below