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

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:

  $\begin{array}{l}\text{Total}{\text{Cost(TC)}}_{\text{current}}\text{=}\text{Fixed}\text{cost+Variable}\text{cost}\\ \text{=}\text{\$45000+\$15×Demand(D)}\end{array}$

For third party inspection:

  $\begin{array}{l}\text{Total}{\text{Cost(TC)}}_{\text{third}\text{party}\text{inspection}}\text{=}\text{Fixed}\text{cost+Variable}\text{cost}\\ \text{=}\text{0+\$19×Demand(D)}\end{array}$

Break even analysis:

  $\text{Total}{\text{Cost(TC)}}_{\text{third}\text{part}\text{inspection}}=Total\cos t{(TC)}_{current}$

  $0+\$19\times (D)=\$45000+\$15\times (D)$

  $\begin{array}{l}\text{4D}\text{=}\text{35000}\\ \text{D}\text{=}\text{35000/4}\\ \text{D}\text{=}\text{8750}\text{hard}\text{drives}\end{array}$

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:

  $\begin{array}{l}T{C}_{Current}=FC+VC\\ =\$45000+\$15\times 8000\\ =\$165000\end{array}$

  $\begin{array}{l}T{C}_{thirdpartyinspection}=FC+VC\\ =\$0+\$17\times 8000\\ =\$136000\end{array}$

  $\text{Total}\text{cost}\text{saving}\text{=}{\text{TC}}_{\text{current}}\text{-}{\text{TC}}_{\text{third}\text{party}\text{inspection}}$

  $\begin{array}{l}=\$155000-\$136000\\ =\$19000\end{array}$

Manufacturer will save $19000 to accept the offer.