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The Green Machine Manufacturing Company has the option to make or buy a component part or one of its lawnmowers. The annual requirement is 25,000 units. A supplier is able to supply the parts for $12.25 per piece. Green Machine estimates that it will cost $700 to prepare the contract with the supplier. To make the parts in-house, Green Machine must invest $25,000 in capital equipment. They estimate it will cost $9.00 per piece to produce the part in-house. Carry all calculations out to two decimal places. What is the total cost at the breakeven point? A. Less than or equal to S65,000 B. Greater than $65,000 but less than or equal to $70,000 C. Greater than $70,000 but less than or equal to $74,000 D. Greater than $74,000
Expert Answer
Breakeven is the point where cost to make or buy is same.
Let quantity be x at breakeven
Cost to make = Capital cost + Cost per unit for inhouse*x = 25000 + 9x
Cost to buy = Contract cost + Cost per unit by supplier*x = 700 + 12.25x
At breakeven, 25000 + 9x = 700 + 12.25x
24300 = 3.25x
x = 7476.92 units
Total cost at breakeven is = 25000 + 9*7476.92 = 92292.31
Ans: D
