Question

Suppose a manufacturer has identified the following options for obtaining a machine part: Buying the part at $200 per unit. Making the part on a numerically controlled machine at $75 per unit (including materials), in which the machine costs $80,000. Making the part in a machining center at $15 per unit (including materials), in which the machining center costs $200,000. What is the break even value in terms of dollar-value ($) and volumes of units sold?

Answer 1

Option 1: Buying
Total cost = $200 * Units

Option 2: Making part on numerically controlled machine
Total cost = $80000 + $75 * Units

Option 3: Making part in machining center
Total cost = $200,000 + $15 * Units

First we have to find the breakeven point of Option 1 and Option 2.
Option 1 = Option 2
$200 * Units = $80,000 + $75 * Units
$125 * Units = $80,000
Units = $80,000 / $125 = 640 units

Here if production in less than 640 units then it should be purchased otherwise make in numerically controlled machine

Now we have to find the breakeven point of Option 2 and Option 3.
Option 2 = Option 3
$80,000 + $75 * Units = $200,000 + $15 * Units
$60 * Units = $120,000
Units = $120,000 / $60 = 2000 units

Here if production in less than 2000 units then Option 2 should be used otherwise Option 3 for units more than 2000.

Conclusion:
If units is less than 640 than Option 1 is best i.e. purchasing at $200.
If units are in between 640 and 2000 then Option 2 is best i.e. making in numerically controlled machine.
If units are more than 2000 then Option 3 is best i.e. making in machining centre.