CBA’s production line of the Widget gadget has a fixed cost of$200,000 and the variable cost is $5 per unit.
a) If the company sells the first 10,000 units at a price of $20and then sells all additional units at $15 per unit, what is thebreak-even point?
b) Suppose that the company is considering outsourcing this toFED company. If so, it will save the fixed and variable costs perunit. If the cost of outsourcing is $13 per unit, over what rangewould each of the production options (in-house and outsourcing) bepreferred? Assume that the price per unit will remain the samewhether it produces the product internally or outsources it.
c) Johndoe Company is interested in buying the Widget gadgetfrom CBA. Johndoe Company is open to letting CBA manufacture themin-house or outsource them under certain conditions. Johndoe willonly buy the outsourced if CBA reduces the selling price to $18 perunit. Also, if CBA does outsource this, Johndoe will only buy 8,000units. On the other hand, if CBA produces the product internally,Johndoe will be willing to pay $20 per unit for all the productsand Johndoe will buy 12,000 widgits. Economically, which option(produce internally or outsource) is better forCBA?
