Colin's Caps makes baseball hats. The company is deciding whether to buy the hats from a company that will produce them for $5 per hat. Colin's variable costs are $2 per unit, and its annual fixed costs are $75,000. The company makes 20,000 hats per year. If the hats are bought, all variable costs and 60% of annual fixed costs will be eliminated. Which is better for Colin, making or buying the hats?

Question

Rylee Randall

Business

4 May, 16:22

Colin's Caps makes baseball hats. The company is deciding whether to buy the hats from a company that will produce them for $5 per hat. Colin's variable costs are $2 per unit, and its annual fixed costs are $75,000. The company makes 20,000 hats per year. If the hats are bought, all variable costs and 60% of annual fixed costs will be eliminated. Which is better for Colin, making or buying the hats?

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Answers (1)

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Donte Peck · Answer 1

The better option would be to buy the hats since he would save $85,000

Explanation:

Consider the total costs of the hats for the tow cases;

Case 1: Colin's Caps

Total annual cost = (Cost per unit*number of units) + Annual fixed costs

where;

Cost per unit=$2

Number of units in a year=20,000 hats

Annual fixed costs=$75,000

replacing;

Total annual cost = (2*20,000) + 75,000

Total annual cost=40,000+75,000=115,000

Total annual cost for Colin's Caps=$115,000

Case 2: Buying the hats

Total buying cost=variable cost+40% of annual fixed costs

where;

variable cost=0

Annual fixed cost = (40/100) * 75,000=30,000

replacing;

Total cost of buying = (0+30,000) = 30,000

Total annual cost of buying the hats=$30,000

The better option would be to buy the hats since he would save $85,000