Answer:
1. Break even quantity is 18,125 units
2. Cost to make 28,000 units = $ 775,000
3. Total costs to buy 28,000 units = $ 696,000
4. Savings by using low cost option ( buy from outside) $ 79,000
Explanation:
Computation of Break even point
Variable cost to make equipment in house $ 25 per unit
Cost to purchase the unit from outside <u>$ 17 per unit</u>
Differential Cost per unit <u>$ 8 per unit</u>
Fixed costs to be paid to outside supplier $ 220,000
Fixed costs to be incurred in house <u>$ 75,000</u>
Incremental fixed costs $ 145,000
Break even point - Differential in fixed costs / Differential cost per unit
$ 145,000/ $ 8 = 18,125 units
Computation of costs to make 28,000 units
Variable costs per unit - $ 25 per unit
Units to be produced - 28,000 units
Total Variable costs $ 25 * 28,000 units $ 700,000
Fixed costs $ <u> 75,000</u>
Total costs to make 28,000 units $ 775,000
Computation of costs to buy 28,000 units
Variable costs per unit - $ 17 per unit
Units to be produced - 28,000 units
Total Variable costs $ 17 * 28,000 units $ 476,000
Fixed costs $ <u>220,000</u>
Total costs to make 28,000 units $ 696,000
Computation of savings
Buying 28,000 units $ 775,000
Making 28,000 units <u>$ 696,000</u>
Savings from buying from outside $ 79,000
