A firm plans to begin production of a new small appliance. The manager has three options: Option 1: purchase the motors for the appliance from a vendor at $5 each: Option 2: produce them in house using technology A with an annual fixed cost of $78000 and a variable cost of $3 per unit, or Option 3: produce them in house using technology B with an annual fixed cost of $40000 and a variable cost of $6 per unit. The range of output for which Option 1 is units. The range of output for which Option 2 is best is units. The range of output for which Option 3 is best is units. Round to the nearest integer, no decimals Enter the range as #### ####, for example: 47500-92000. If an option is outperformed by other option(s), enter NEVER (all capital) For an open ended range use INFINITY (all capital), for example: 47500-INFINITY If an option is good only at one point, just enter the value of the output, for example 8750 DO NOT USE parentheses, spaces or commas!

## Expert Answer

a)

Total cost TC= Fixed cost + (Variable cost*Quantity)

Option 1 TC = 5Q

Option 2 TC = 78000+ 3Q

Option 3 TC = 40000 + 6Q

We get the indifference point when we equals the total cost

Option 1 TC = Option 2 TC

5Q = 78000+ 3Q

Q = 39000

Option 2 TC = Option 3 TC

78000+ 3Q = 40000 + 6Q

Q = 126666.67

Option 3 TC = Option 1 TC

40000 + 6Q = 5Q

Q = 40000

By observing above indifference points

The range of output for which option 1 is best is 1-39000 units

The range of output for which option 2 is best is 39000-INFINITY

The range of output for which option 3 is best is NEVER