Question

The Green Machine Manufacturing Company has the option to make or buy a component part for one of its lawnmowers. The annual requirement is 25,000 units. A supplier is able to supply the parts for $12.25 per piece. Green Machine estimates that it will cost $700 to prepare the contract with the supplier. To make the parts in-house, Green Machine must invest $100,000 in capital equipment. They estimate it will cost $9.00 per piece to produce the part in-house. Carry all calculations out to two decimal places.

1. What is the breakeven quantity?

A)        Less than or equal to 30,000

B)        Greater than 30,000 but less than or equal to 35,000

C)        Greater than 35000 but less than or equal to 40,000

D)        Greater than 40,000 but less than or equal to 45,000

E)        Greater than 45,000

2. What is the total cost at the breakeven point?

A)        Less than or equal to $365,000

B)        Greater than $365,000 but less than or equal to $370,000

C)        Greater than $370,000 but less than or equal to $375,000

D)        Greater than $375,000

3. If the demand is 25,000 units, should Green Machine make or buy the part?

A)        Buy the part

B)        Make the part

C)        Both

D)        Neither

E)        Not enough information

4. What is the cost savings from making the correct decision?

A)        Less than or equal to $20,000

B)        Greater than $20,000 but less than or equal to $25,000

C)        Greater than $25,000 but less than or equal to $30,000

D)        Greater than $30,000 but less than or equal to $35,000

E)        Greater than $35,000

Answer 1

Break-even analysis is a technique by which business identify the sales volume when the total cost and total revenue is equal. So, the company neither makes profit nor loss.

Break-even analysis is important for business because it help in drafting good business plan by determining cost structure and the volume required to cover the cost in order to make profit.

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