Claris Water Company makes and sells filters for water drinking fountains for the public. The filter sells for $50. Recently a make/buy analysis was done based on the need for new manufacturing equipment. The equipment first cost of $200,000 and $25,000 annual operation cost comprise the fixed cost, while Claris’s variable cost is $20 per filter. The equipment has a 5-year life, no salvage value, and the MARR is 6% per year. The decision to make the filter was based on the breakeven point and the historical sales level of 5000 filters per year.

(a) Determine the breakeven point.

(b) An engineer at Claris learned that an outsourcing firm offered to make the filters for $30 each, but this offer was rejected by the president as entirely too expensive. Perform the breakeven analysis of the two options and determine if the “make” decision was correct.

(c) Develop and use the profit relations for both options to verify the preceding answers.

(d) Use a spreadsheet to verify the answers to parts (b) and (c) above by plotting the profit lines.