Telly Industries is a multiproduct company that currently manufactures 30,000 units of Part MR24 each month. The facilities now being used to produce Part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 84,000 units per month. If Telly were to buy Part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40 percent of its present amount. The variable production costs of Part MR24 are $11 per unit.

Question

a. If Telly Industries continues to use 30,000 units of Part MR24 each month, it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier's unit price is less than how much?
b. If Telly Industries can obtain Part MR24 from an outside supplier at a unit purchase price of $12.875, what is the monthly usage at which it will be indifferent between purchasing and making Part MR24?

Answer 1

a. Each month Telly incurs $150,000 of fixed cost to have capacity to produce 84,000 units. They are only using 30,000 units of that capacity now. If they outsource MR24, they will continue to incur 40% of the fixed costs, or $60,000. However, they save $90,000 ($150,000 - $60,000). Besides saving the fixed costs they save $330,000 of variable costs ($11 × 30,000) or a total cost savings of $420,000. To be indifferent between outsourcing and continuing to produce, the outside price must be $14 ($420,000 ÷ 30,000). An alternative way to solve the problem and get the same answer is:



b.



$12.875Q + $60,000 = $11Q + $150,000

$1.875Q = $90,000

Q = 48,000 units