Soft Key is trying to determine how best to produce its newest product, DVORK keyboards. The keyboards could be produced in house using either Process A or Process B or purchased from a supplier. For what levels of demand should each process be chosen?

Fixed Cost Variable CostProcess A $8,000 $10Process B $20,000 $4Supplier $ 0 $20

Supplier= From 1 to 799 units

Process A= 801 to 1,999 units

Process B= 2,001 to infinity

Explanation:

Giving the following information:

Process A:

Fixed costs= $8,000

Variable cost= $10

Process B:

Fixed costs= $20,000

Varaible cost= $4

Supplier:

Buying price= $20

First, we need to determine the cost formula for each process:

Process A= 8,000 + 10x

Process B= 20,000 + 4x

To determine the indifference point, we need to determine the value of X for each process:

Process A= Process B

8,000 + 10x= 20,000 + 4x

6x= 12,000

x= 2,000 units

To prove it:

Process A= 8,000 + 10*2,000= $28,000

Process B= 20,000 + 4*2,000= $28,000

From 2,001 units and up, Process B is cheaper than Process A, because the unitary variable cost is lower.

Now, we have to determine the level of demand for Process A and the supplier.

Supplier= 20x

Process A= Supplier

8,000 + 10x= 20x

8,000= 10x

800= x

To prove:

Process A= 8,000 + 10*800= $16,000

Supplier= 20*800= $16,000

From 801 units to 1,999 Process A is cheaper than the Supplier and Process B.

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