Question

Vista Company manufactures electronic equipment. It currently purchases the special switches used in each of its products from an outside supplier. The supplier charges Vista $5.50 per switch. Vista’s CEO is considering purchasing either machine A or machine B so the company can manufacture its own switches. The projected data are as follows:

	Machine A				Machine B
Annual fixed costs	$	632,400			$	860,100
Variable cost per switch		1.78				0.80

Required:

1. For each machine, what is the minimum number of switches that Vista must make annually for total costs to equal outside purchase cost?

2. What volume level would produce the same total costs regardless of the machine purchased?

3. What is the most profitable alternative for producing 235,000 switches per year and what is the total cost of that alternative?

Answer 1

			Machine-A	Machine-B
Supplier cost			5.5	5.5
Lless: variable cost			1.78	0.8
Contribution towards fixed cost			3.72	4.7
Fixed cost			632400	860100
Number of units to be produced			170000	183000
(Fixed cost/ Contribution)
Req 2.
Indifference units = Change in fixed cost / Change in Variable cost per unit
		(860100-632400) / (1.78-0.80)= 232347 units
Req 3.
For 235000 units, Machine-B shall be selected as after 232347 units of production the machine with least variable cocst per unitt shall be used.
Hence, Total cost of 235000 units:
Fixed cost			860100
Variable cost (235000*0.80)			188000
Total cost			1048100