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Solution To Solved Problems: 1.S1 Make or Buy

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Vibhuti Batra
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82 views

Solution To Solved Problems: 1.S1 Make or Buy

Uploaded by

Vibhuti Batra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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CHAPTER 1

INTRODUCTION
SOLUTION TO SOLVED PROBLEMS

1.S1 Make or Buy


Power Notebooks, Inc. plans to manufacture a new line of notebook computers. Management
is trying to decide whether to purchase the LCD screens for the computers from an outside
supplier or to manufacture the screens in-house. The screens cost $100 each from the outside
supplier. To set up the assembly process required to produce the screens in-house would cost
$100,000. The company could then produce each screen for $75. The number of notebooks
that eventually will be produced (Q) is unknown at this point.
a. Set up a spreadsheet that will display the total cost of both options for any value of Q. Use
trial-and-error with the spreadsheet to determine the range of production volumes for
which each alternative is best.
If Power Notebooks purchases the screens, the fixed cost is $0 and the unit cost is $100.
These data are entered into B2:B3.

If Power Notebooks manufactures the screens, the fixed cost is $100,000 and the unit
cost is $75. These data are entered into D2:D3.

The number of LCD screens needed (Q) is unknown. Cell C6 will be used for this
quantity.

In general, Total Cost = Fixed Cost + (Unit Cost)(LCD Screens Needed). This formula is
entered into B4 and D4.

Trial and error with the spreadsheet shows that purchasing is cheaper if Q < 4000,
manufacturing is cheaper if Q > 4000, and the costs are identical when Q = 4000.

The spreadsheet is shown below.

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution


without the prior written consent of McGraw-Hill Education

1
Rang e Name Ce ll
ManufactureFixedCost D2
ManufactureTotalCost D4
ManufactureUnitCost D3
PurchaseFixedCost B2
PurchaseTotalCost B4
PurchaseUnitCost B3
Q C6

b. Use a graphical procedure to determine the break-even point for Q (i.e., the quantity at
which both options yield the same cost).
To determine the ranges of Q for which each source is cheapest, graph the total cost
versus Q, as shown below. The total cost lines cross at Q = 4,000. This is the break-even
point for Q.

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution


without the prior written consent of McGraw-Hill Education

2
c. Use an algebraic procedure to determine the break-even point for Q.
The total cost if Power Notebooks purchases the LCD screens is TCpurchase = ($100)Q.
The total cost if Power Notebooks manufactures the LCD screens is TCmanufacture =
$100,000 + ($75)Q.
The break-even point for Q occurs when TCpurchase = TCmanufacture.
($100)Q = $100,000 + ($75)Q when ($25)Q = $100,000, or Q = 4,000.

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution


without the prior written consent of McGraw-Hill Education

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