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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
