A grocery retail store owns an in-house bakery. The bakery is considering two different two different ovens for baking baguette. The first oven is less energy efficient, with fixed costs of $10,000 per year and variable costs of $0.50 per baguette. The second (more capital-intensive and more energy efficient) oven has fixed costs of $30,000 per year but has variable costs of $0.25 per baguette. The bakery expects to sell the baguettes at $3.00 per unit.

a. What are the cross-over quantity and cost? Based on demand forecast, if the expected annual sales is 75,000 baguettes, which process would you choose? Using an appropriately labelled diagram, plot the two cost lines on a single graph illustrating the crossover point. Identify on the graph the approximate range over which each oven provides a lower cost. If the bakery must process 100,000 baguettes per year, how high (or low) must the annual fixed costs for the more capital-intensive oven be for the bakery to be indifferent between the two types of ovens? If the bakery must process 100,000 baguettes per year, how low (or high) must the variable costs for the less capital-intensive oven be for the bakery to be indifferent between the two ovens?

b. What is the break-even quantity for the less capital-intensive oven (i.e., where profit is equal to zero)? What is the break-even quantity for the more capital-intensive oven? For the more capital-intensive oven, if the firm must process 100,000 baguettes per year, how high (low) must the variable costs be for the bakery to break-even?

c. Now suppose that the grocery store is considering a third option - outsourcing the baguettes at a cost of $2.5 per baguette. Identify the approximate range over which outsourcing provides the lowest cost. If the grocer anticipates selling 100,000 baguettes per year, would you suggest outsourcing? Why? Using an appropriately and clearly labelled diagram, plot the three total cost lines on a single graph illustrating the crossover points. Identify on the graph the approximate range over which each option provides the lowest cost.