CHAPTER 1

INTRODUCTION
SOLUTION TO SOLVED PROBLEMS

1.S1 Make or Buy

Power Notebooks, Inc. plans to manufacture a new line of notebook computers. Management is
trying to decide whether to purchase the LCD screens for the computers from an outside supplier
or to manufacture the screens in-house. The screens cost $100 each from the outside supplier. To
set up the assembly process required to produce the screens in-house would cost $100,000. The
company could then produce each screen for $75. The number of notebooks that eventually will
be produced (Q) is unknown at this point.
a. Set up a spreadsheet that will display the total cost of both options for any value of Q. Use
trial-and-error with the spreadsheet to determine the range of production volumes for which
each alternative is best.
If Power Notebooks purchases the screens, the fixed cost is $0 and the unit cost is $100.
These data are entered into B2:B3.

If Power Notebooks manufactures the screens, the fixed cost is $100,000 and the unit cost is
$75. These data are entered into D2:D3.

The number of LCD screens needed (Q) is unknown. Cell C6 will be used for this quantity.

In general, Total Cost = Fixed Cost + (Unit Cost)(LCD Screens Needed). This formula is
entered into B4 and D4.

Trial and error with the spreadsheet shows that purchasing is cheaper if Q < 4000,
manufacturing is cheaper if Q > 4000, and the costs are identical when Q = 4000.

The spreadsheet is shown below.

Range Name Cell
ManufactureFixedCost D2
A B C D ManufactureTotalCost D4
1 Purchase Manufacture In-House ManufactureUnitCost D3
2 Fixed Cost $0 $100,000
3 Unit Cost $100 $75
PurchaseFixedCost B2
4 Total Cost $400,000 $400,000 PurchaseTotalCost B4
5 PurchaseUnitCost B3
6 LCD Screens Needed (Q) 4,000 Q C6

A B C D
4 Total Cost =PurchaseFixedCost+PurchaseUnitCost*Q =ManufactureFixedCost+ManufactureUnitCost*Q

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b. Use a graphical procedure to determine the break-even point for Q (i.e., the quantity at
which both options yield the same cost).
To determine the ranges of Q for which each source is cheapest, graph the total cost versus
Q, as shown below. The total cost lines cross at Q = 4,000. This is the break-even point for
Q.

c. Use an algebraic procedure to determine the break-even point for Q.

The total cost if Power Notebooks purchases the LCD screens is TCpurchase = ($100)Q.
The total cost if Power Notebooks manufactures the LCD screens is TCmanufacture = $100,000
+ ($75)Q.
The break-even point for Q occurs when TCpurchase = TCmanufacture.
($100)Q = $100,000 + ($75)Q when ($25)Q = $100,000, or Q = 4,000.