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Chapter 1

Introduction

Solution to Solved Problems

Power Notebooks, Inc. plans to manufacture a new line of notebook computers. Management is trying to decide whether to purchase the LCD screens for the computers from an outside supplier or to manufacture the screens in-house. The screens cost $100 each from the outside supplier. To set up the assembly process required to produce the screens in-house would cost $100,000. The company could then produce each screen for $75. The number of notebooks that eventually will be produced (Q) is unknown at this point.

a. Set up a spreadsheet that will display the total cost of both options for any value of Q. Use trial-and-error with the spreadsheet to determine the range of production volumes for which each alternative is best.

If Power Notebooks purchases the screens, the fixed cost is $0 and the unit cost is $100. These data are entered into B2:B3.

If Power Notebooks manufactures the screens, the fixed cost is $100,000 and the unit cost is $75. These data are entered into D2:D3.

The number of LCD screens needed (*Q*) is unknown. Cell C6 will be used for this quantity.

In general, *Total Cost* = *Fixed Cost* + (*Unit Cost*)(*LCD Screens Needed*). This formula is entered into B4 and D4.

Trial and error with the spreadsheet shows that purchasing is cheaper if *Q* < 4000, manufacturing is cheaper if *Q* > 4000, and the costs are identical when *Q* = 4000.

The spreadsheet is shown below.

Only ** 0 ** units of this product remain