Perfect Product Ltd is currently buying a component from a local supplier at 15 each. The supply is tending to be irregular. Two proposals are under consideration: (i) Buy and instal a semi-automatic machine for manufacturing this component, which would involve an annual fixed cost of `9 lakh and a variable cost of `6 per manufactured component. (ii) Buy and instal an automatic machine for manufacturing this component, incurring an annual fixed cost of `15 lakh and a variable cost of `5 per manufactured component. Determine with necessary computation:
1. The annual volume required in each case to justify the switchover from “outside purchase” to “own manufacture.”
2. The annual volume required to justify selection of the automatic machine instead of semiautomatic machine.
3. If the annual requirement for the coming year is expected to be 5,00,000 units and the volume is expected to increase rapidly thereafter, would you recommended the automatic or semiautomatic machine? Justify your recommendation.
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