OM (with OM Online, 1 term (6 months) Printed Access Card)
OM (with OM Online, 1 term (6 months) Printed Access Card)
6th Edition
ISBN: 9781305664791
Author: David Alan Collier, James R. Evans
Publisher: Cengage Learning
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Chapter 4, Problem 11PA
Summary Introduction

Interpretation:Whether manufacturer should accept the offer or not.

Concept Introduction:

Breakeven analysis of any industry shows volume of production required to remain profitable. Break even point is a situation where firm is at no profit no loss situation

Expert Solution & Answer
Check Mark

Answer to Problem 11PA

Manufacturer will save $19000 to accept the offer.

Explanation of Solution

Given information:

Inspection cost = $19

Demand = 8000 units

For current situation:

  TotalCost(TC)current=Fixedcost+Variablecost=$45000+$15×Demand(D)

For third party inspection:

  TotalCost(TC)thirdpartyinspection=Fixedcost+Variablecost=0+$19×Demand(D)

Break even analysis:

  TotalCost(TC)thirdpartinspection=Totalcost(TC)current

  0+$19×(D)=$45000+$15×(D)

  4D=35000D=35000/4D=8750harddrives

Demand (d)=8750 hard drives

Since actual demand is 8000 which is less than 8750

The manufacturer should accept the offer of third party as:

  TCCurrent=FC+VC=$45000+$15×8000=$165000

  TCthirdpartyinspection=FC+VC=$0+$17×8000=$136000

  Totalcostsaving=TCcurrent-TCthirdpartyinspection

  =$155000$136000=$19000

Manufacturer will save $19000 to accept the offer.

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