A firm is considering whether to continue to buy a particular component or to make the component themselves. There is no fixed cost associated with buying the component, but each component costs $17 to purchase. If the firm makes the component, it will incur a fixed cost of $5,000, but will be able to produce each component for $10. What is the break-even quantity?
A) 500 units
B) 7 units
C) 714.3 units
D) 294.1 units

Question

Quizplus · Accepted Answer

To find the break-even quantity, we need to set the total cost of buying equal to the total cost of making:

Total cost of buying = Total cost of making
$17Q = $5,000 + $10Q
$7Q = $5,000
Q = 714.3

Therefore, the break-even quantity is 714.3 units.

To determine the best choice, we need to compare the total cost of buying versus the total cost of making at various production levels.

At quantities lower than the break-even point (714.3 units), it is cheaper to buy the component. 
At quantities higher than the break-even point, it is cheaper to make the component.

Thus, if the firm expects to produce less than 714.3 components, they should continue buying the component. If the firm expects to produce more than 714.3 components, they should start making the component.

A Firm Is Considering Whether to Continue to Buy a Particular