Question

3)     Bee Refrigeration Co. intend to increase     capacity by overcoming a bottleneck     operation by adding new equipment.     Two vendor (A and B) have presented     their proposal. The fixed cost and     variable cost from the vendors are RM     50,000 & RM12.00 and RM 70,000 & RM     10.00 respectively. The revenue     generated by each unit is RM 20.00.     Which     option is better, if the expected volume is     15,000 units? Justify why?

Answer 1

3.

When 15000 units are produced, then:

Total cost as per vendor A alternative = 50000 + 12*15000 = RM 230000

Total cost as per vendor B alternative = 70000 + 10*15000 = RM 220000

Since, total cost is relatively less with vendor B, then Vendor B should be selected.

Further,

Let crossover point = X

Then,

50000 + 12*X = 70000 + 10*X

X = 20000/2 = 10000 units

So, any production volume level that is less than 10000 units, should be processed by vendor A, and above the limit of 10000 units, it should be processed by vendor B.

Since, required volume is 15000 units, so it should be done by vendor B alternative.