Find the break-even quantity

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Reference no: EM13813072

1. If a firm is able to sustain the same level of operations in terms of sales and administrative expenses but reduces its materials costs by $50,000 through smarter purchases, what is the profit -leverage effect on gross profits? What is the profit-leverage effect on profits before taxes?

2.         Costs                           Make Option                          Buy Option

            Fixed Cost                  $25,000                                  $3,000

            Variable Cost                         $8                                            $12

a. Find the break-even quantity and the total cost at the break-even point.

b. If the requirement is 4,500 units, is it more cost-effective for the firm to buy or make the components? What is the cost savings for choosing the cheaper option?

c. If the requirement is 6,000 units, is it more cost-effective for the firm to buy or make the components? What is the cost savings for choosing the cheaper option?

3. A Las Vegas, Nevada, manufacturer has the option to make or buy one of its component parts. The annual requirement is 20,000 units. A supplier is able to supply the parts for $10 per piece. The firm estimates that it costs $600 to prepare the contract with the supplier. To make the parts in-house, the firm must invest $50,000 in capital equipment and estimates that the parts cost $8 per piece.

a. Assuming the cost is the only criterion, use break-even analysis to determine whether the firm should make or buy the item. What is the break-even quantity and what is the total cost at the break-even point?

b. Calculate the total costs for both options at 20,000 units. What is the cost savings for choosing the cheaper option?

4.  A buyer received bids and other relevant information from three suppliers for a vital component part for its latest product. Given the following information, use total cost analysis to determine which supplier should be chosen. Late delivery of the component results in 70 percent lost sales and 30 percent back orders of finished goods.

Order size                                                                                          2,000

Requirements (annual forecast)                                                     240,000 units

Weight per engine                                                                            40 pounds

Order processing cost                                                                      $200/order

Inventory carrying rate                                                                    20% per year

Cost of working capital                                                                     10% per year

Profit margin                                                                                     15%

Price of finished goods                                                                     $10,500

Back order cost                                                                                 $120 per unit

Order Size                              Supplier 1                  Supplier 2                  Supplier 3

1 to 999 units/order                        $200 per unit             $205 per unit             $198 per unit

1000 to 2999 units/order   $195 per unit             $190 per unit             $192 per unit

3000+ units/order               $190 per unit             $185 per unit             $190 per unit

Tooling Cost                          $12,000                      $10,000                      $15,000

Terms                                     2/10, net 30               1/15, net 30               1/10, net 20

Distance                                 120 miles                   100 miles                   150 miles

Supplier Quality Rating         2%                              1%                              2%

Supplier Delivery Rating      1%                              1%                              2%

Truckload (TL > or equal to 40,000 lbs): $0.95 per ton-mile

Less-than-truckload (LTL): $1.20 per ton-mile

Note: per ton-mile = 2,000 lbs per mile

Reference no: EM13813072

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