Assignment:
Sean is in charge of the production of a newly designed electrical tool. He is facing the sourcing decision of the motor used in the design. If the company decide to make the motor by itself, then they need to invest $300,000 to build up the production line, cost after that will be $30 each. They can buy the motor for an outside contractor, who will charge them $50,000 for tooling and $100 per unit.
a. What is the breakeven quantity for the two options illustrated?
b. If the expected production quantity is 5,000 units, would you choose the make or buy option? Why?
c. If they only will be able sell 1,000 units, what will be the total cost associated with the best decision at this quantity?