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Management

Suppose that a firm has the option to make or buy a part. Its annual requirement is 15,000 units. A supplier is able to supply the part at $8 per unit. The firm estimates that it costs $500 to prepare the contract with the supplier. To make the part, the firm must invest $29,000 in equipment, and the firm estimates that it costs $4 per unit to make the part.

COSTS MAKE OPTION BUY OPTION
Fixed Cost $29,000 $500
Variable Cost $4 $8
Annual Requirement = 15,000 units

Questions

1. What is the break-even point? Round your answer to the nearest whole number.

2. What is the total cost at the break-even point? Round your answer to the nearest dollar.

3. What is the total cost for the make option? Round your answer to the nearest dollar.

4. What is the total cost for the buy option? Round your answer to the nearest dollar.

5. What is the cost difference (make – buy)? Round your answer to the nearest dollar. Use the minus sign to enter a negative difference, if any.

6. To obtain the lowest production cost, should the firm make or buy the part?

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