Manor, Inc. currently manufactures 1,000 subcomponents per month in one of its factories. The unit costs to produce the subcomponents are: The unit costs to produce are: Manor is considering purchasing the subcomponents from an outside supplier, who normally charges $300 per unit. The supplier also has an "Exclusive Buyer's Club" which costs $30,000 per month to join, but whose members can purchase the subcomponents for $250 per unit. Fixed overhead is not avoidable. How many units would Manor need to order per month to make it worth it to join the "Exclusive Buyer's Club"?
A) 800
B) 1,000
C) 1,200
D) 1,500

Question

Manor, Inc. currently manufactures 1,000 subcomponents per month in one of its factories. The unit costs to produce the subcomponents are: The unit costs to produce are:  Manor is considering purchasing the subcomponents from an outside supplier, who normally charges $300 per unit. The supplier also has an "Exclusive Buyer's Club" which costs $30,000 per month to join, but whose members can purchase the subcomponents for $250 per unit. Fixed overhead is not avoidable. How many units would Manor need to order per month to make it worth it to join the "Exclusive Buyer's Club"?
A) 800 
B) 1,000 
C) 1,200 
D) 1,500

Quizplus · Accepted Answer

To determine the breakeven quantity, we need to compare the cost of producing 1,000 subcomponents in-house to the cost of purchasing them from the outside supplier as a member of the "Exclusive Buyer's Club."

Cost to produce 1,000 subcomponents in-house: 
Direct materials: $4,000
Direct labor: $3,000
Variable overhead: $2,000
Total variable costs: $9,000
Fixed overhead: $5,000
Total cost: $14,000

Cost to purchase 1,000 subcomponents from the outside supplier as a member of the "Exclusive Buyer's Club":
Purchase cost: $250,000
Membership cost: $30,000
Total cost: $280,000

Breakeven quantity = (Fixed costs for in-house production)/(Cost savings per unit from purchasing)
Breakeven quantity = ($5,000)/($50)
Breakeven quantity = 100

Since the breakeven quantity is 100, Manor would need to purchase more than 1,100 subcomponents per month to make it worth it to join the "Exclusive Buyer's Club." Therefore, the best choice is C) 1,200.