Use the following information to answer the questions below.
You currently make a part for old equipment at a cost of $20 / unit. The annual fixed cost for this equipment is $50,000. You have found an outside supplier who will make the part for $15 / unit if you will pay their annual fixed costs of $200,000 / year (see table).

-Refer to the instruction above. For what range of output would you prefer to buy?
A) 0 - 30,000 units per year
B) 30,000 or more units per year
C) 40,000 or more units per year
D) 0 - 40,000 units per year

Question

Use the following information to answer the questions below.
You currently make a part for old equipment at a cost of $20 / unit. The annual fixed cost for this equipment is $50,000. You have found an outside supplier who will make the part for $15 / unit if you will pay their annual fixed costs of $200,000 / year (see table).
 
-Refer to the instruction above. For what range of output would you prefer to buy?
A) 0 - 30,000 units per year 
B) 30,000 or more units per year 
C) 40,000 or more units per year 
D) 0 - 40,000 units per year

Quizplus · Accepted Answer

The cost equation for making the part in-house is:
Cost = 20x + 50000, where x is the number of units produced.
The cost equation for buying from the outside supplier is:
Cost = 15x + (200000/year)
To find the range of output where it is cheaper to buy from the supplier, we need to set the two cost equations equal to each other:
20x + 50000 = 15x + 200000/year
5x = 150000/year
x = 30000
So buying from the supplier is cheaper for any output of 30,000 or more units per year.

Use the Following Information to Answer the Questions Below