Exercise 4.36

Flounder Company is currently purchasing a component for $13 but is considering making the part internally. The plant engineer has suggested two alternatives. The first alternative would increase fixed costs by $12,200 per month and incur variable costs of $9 per part. The second alternative would increase fixed costs by $19,500 and incur variable costs of $7 per part.

What level of volume is necessary to justify making the part?(Round answers to 0 decimal places, e.g. 125.)

Level of volume

First alternatives:

Second alternatives:

(in units)

Over what relevant ranges of volume is each alternative optimal?

1.For demand under units, purchase the part

2.For demand between and units, adopt Alternative 1

3.For demand over units, adopt Alternative 2

At a level of output of 3,350 units, which alternative is most profitable?