Question 1

CV Pte Ltd manufactures electronic calculators. Currently, CV purchases the special chip used to manufacture its products from an outside supplier. The supplier charges CV $8 per chip. CVs CEO is considering a proposal to purchase either machine A or machine B so that the company can manufacture its own chips. In addition, the outside supplier has informed CV that they will increase current prices by $2 per chip. The projected data on the two machines are as follows:

	Machine A	Machine B
Annual fixed cost	$740,000	$1,056,000
Variable cost per chip	$2.60	$1.20

Required:

1. For each machine, what is the minimum number of chips that CV must manufacture annually for total costs to be equal to the cost of purchasing from outside supplier?

(4 marks)

2. At what production volume would it cost CV the same total costs regardless of which machine is purchased?

(5 marks)

3. Which is the most profitable alternative if CV required 240,000 chips per year? Support your answer with relevant computations.

(6 marks)

4. Propose which alternative you would recommend the CEO of CV to choose. Explain your recommendation clearly.

(7 marks)

5. List three (3) qualitative issues CV should consider when deciding whether to continue buying the chips or start producing the chips internally.

(6 marks)