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. What is the breakeven quantity

Answer 1

Answer:

30,769.23

Explanation:

At which point the price doing the component matches the purchased amount of 12.25

100,000 / Q + 9 = 12.25

100,000 / Q = 12.25 - 9

Q = 100,000 / 3.25 = 30,769.23

At this point the cost for producing the component  or bring them from abroad has the same utility (indifference zone) below this area, it is more profitable to keept outsorcing while above it, it will expense much more.