Question

You are asked to recommend whether a firm should make or purchase product A. The following are data concerning the two options. For the purchase​ option, the firm can buy product A at​$25 per unit. For the make​ option, the firm can produce product A based on the following cost estimation data. The firm has to pay a weekly rental payment of ​$39,200 for the production facility. With the use of this​ facility, the firm also has to hire five operators to help make product A. Each operator works eight hours per​ day, five days per week at the rate of ​$14 per hour. In other​ words, the rental and labor expenses are fixed costs. The material cost for the make option is ​$18 per unit of product A.a. Find a weekly amount of product A that provides the breakeven point for the firm. The breakeven point in this problem indicates the​ firm's indifference between purchasing or making product A.b. If the firm estimates the sale of product A to be 7,900 units per​ week, should it make or purchase product​ A?1. A weekly amount of product A that provides the breakeven point for the firm is ? units per week. ​(Round to the nearest whole​ number.)2. If the firm makes 7,900 units per​ week, the total cost will be ? ​(Round to the nearest​ dollar.)3. If the firm purchases 7,900 units per​ week, the total cost will be ? ​(Round to the nearest​ dollar.)

Answer 1

Answer:

a. 6000 units

b. The firm should make the product

2. $ 184200

3. $ 197500

Step-by-step explanation:

a. When is someone indifferent towards buying something? In this case when the cost in dollars is the same. The Break Even Point (BEP)  makes sense when the firm is indifferent between purchasing it or manufacturing it because the cost of either one or the other is the same. We know the cost of purchasing it ($25 per unit), now we would have to know the cost of producing it with the given data.

Cost of production = Fixed cost + Variable cost

Fixed cost = Rental + labor

Fixed cost = 39200 + ( 5 Operator * 5 days * 8 hours * $14 per hour)

Fixed cost = 39200 + 2800

Fixed cost = 42000

Variable cost =  $18 u                u (units)

Cost of production = 42000 + 18u

When does this cost of production is equal to the cost of purchase?

when

Cost of production = Cost of purchase

42000- 18u = 25u

42000 = 25u - 18 u

42000 = 7u

u = 42000/7

u= 6000

b. The firm should make the product because the cost would be cheaper than purchasing it. It costs 184200 dollars to produce 7900 units vs 197500 dollars when buying them.

2. The cost of production is

Cost of production = 42000 + 18u

Cost of production = 42000 + 18(7900)

Cost of production = 42000 + 142200

Cost of production = 184200

3. The cost of purchase is

Cost of purchase = 25u

Cost of purchase = 25(7900)

Cost of purchase = 197500