An electronics firm is considering two different manufacturing processes to make a new product. The first process is less capital-intensive, with fixed costs of $100,000 per year and variable costs of $1,400 per unit. The second (more capital-intensive) process has fixed costs of $800,000 per year but has variable costs of $400 per unit. The firm expects to sell the product at $1,200 per unit.
a. What are the cross-over quantity and cost? If the expected annual sales for the product is 800 units, which process would you choose? Using an appropriately labelled diagram, plot the two cost lines on a single graph illustrating the crossover point. Identify on the graph, the approximate range over which each process provides a lower cost. If the firm must process 1,000 units per year, what value must the fixed costs for the more capital-intensive process be for the firm to be indifferent between the two processes? If the firm must process 1,000 units per year, what value must the variable costs for the less capital-intensive process be for the firm to be indifferent between the two processes?
b. What is the break-even quantity for the less capital-intensive process? What is the break-even quantity for the more capital-intensive process? For the more capital-intensive process, if the firm must process 1,000 units per year, how high must the variable costs be for the firm to break- even?
c. Now suppose that the firm is considering a third option - outsourcing the product at a cost of $900 per unit. Identify the approximate range over which outsourcing provides the lowest cost. If the firm anticipates producing 1,000 units per year, would you suggest outsourcing? Why? Using an appropriately and clearly labelled diagram, plot the three total cost lines on a single graph illustrating the crossover points. Identify on the graph, the approximate range over which each option provides the lowest cost.