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. Which decision below is correct?
A) Make if estimated demand is less than 714.3 units
B) Buy if estimated demand is greater than 5,000 units
C) Make if estimated demand is greater than 714.3 units
D) Buy if estimated demand is greater than 714.3 units

Question

Quizplus · Accepted Answer

The firm should make the component if the cost of making is less than buying. The break-even point is when $5,000 + $10x = $17x, solving gives x = 714.3 units. Thus, make if demand is greater than 714.3 units.

A Firm Is Considering Whether to Continue to Buy a Particular