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Vista Company manufactures electronic equipment. In 2018, it purchased from an outside supplier the special switches used in each of its products. The supplier charged Vista $2.5 per switch. As an alternative, Vista's CEO considered purchasing either machine A or machine B so the company could manufacture its own switches. The CEO decided at the beginning of 2019 to purchase machine A, based on the following data:
Machine A Machine B
Annual fixed cost (depreciation) $170,000 $214,000
Variable cost per switch 0.80 0.45
Required:
Question 1. Assume that machine A has not yet been purchased. What is the annual volume that would make the company indifferent between the two decision alternatives (i.e., purchasing and then using machine A to make the switches versus purchasing the switches from the outside vendor)?
Question 2. Assume that machine A has already been purchased. Is it preferable to use machine A to make the switches or to purchase the switches from the external supplier?
Question 3. Assume that machine A has already been purchased. At what annual volume level should Vista consider replacing machine A with machine B?
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