A few years ago, the Toronto plant of a multinational soup producer was in competition with its U.S. sister plant to supply the Northeastern U.S. market. However, its cost of production was not competitive. One source of cost disadvantage was the tin cans. The Toronto plant bought its tin cans for approximately $6.00 per case of 48 cans, where as the U.S. plant made its own cans at the cost of $5.00 (in Canadian dollars) per case. The manager estimated that installing an automatic can line cost $2.0 million for building expansion and $ 12 million for equipment. The can line would have a variable production cost of $5.50 per case.
a. Assuming a useful life of 10 years, no salvage value, and straight-line depreciation, calculate the annual fixed cost of the canning line.
b. Calculate the annual breakeven quantity' between buying and making the cans in-house.
c. Draw a graph of the annual cost of buying and annual cost of making (try to make it to scale), and determine which option is better if the annual requirement of the Toronto plant was 5 million cases of cans.