A U.S. company is currently producing a product in house with a yearly fixed cost of $5 million and a variable cost of $3 per unit. A Chinese subcontractor can produce the product with equal quality for a yearly fixed cost of $3 million and a variable cost of $6 per unit.
a) What is the break-even quantity in this make-or-buy decision? Please include the formula, at least one step of calculation, and the correct answer for full credit.
b) If the expected production quantity is 1 million units, should the company make or buy? Why?
c) Suppose the Chinese subcontractor is willing to share the economies-of-scale benefits it might achieve in production and offers an incremental quantity discount on the variable cost. The subcontractor now charges $6 per unit for the first 0.5 million units in an order and $4 per unit for any additional units in the order. What is the break-even quantity in this case?