Answer:
The better option would be to buy the hats since he would save $85,000
Explanation:
Consider the total costs of the hats for the tow cases;
Case 1: Colin's Caps
Total annual cost=(Cost per unit×number of units)+Annual fixed costs
where;
Cost per unit=$2
Number of units in a year=20,000 hats
Annual fixed costs=$75,000
replacing;
Total annual cost=(2×20,000)+75,000
Total annual cost=40,000+75,000=115,000
Total annual cost for Colin's Caps=$115,000
Case 2: Buying the hats
Total buying cost=variable cost+40% of annual fixed costs
where;
variable cost=0
Annual fixed cost=(40/100)×75,000=30,000
replacing;
Total cost of buying=(0+30,000)=30,000
Total annual cost of buying the hats=$30,000
The better option would be to buy the hats since he would save $85,000
