KLM, Inc| buy a new product that has a high demand in the market

KLM, Inc. is facing a problem whether to make or buy a new product that has a high demand in the market. If it makes the product, it expects to incur variable costs of ₱30/unit for direct materials; ₱16/unit for direct labor; and ₱10/unit for manufacturing overhead; and fixed costs involving factory equipment lease for ₱110,000; factory building rent for ₱290,000; and production supervisor’s salaries of ₱140,000. The other option is for the company to purchase the product from a reliable supplier at ₱100/unit. The company plans to sell the product at the prevailing market price of ₱140/unit. Perform a break-even analysis and answer the following:

  1. At what volume will the company be indifferent between making and buying? Why?
  2. What option shall the firm choose when it intends to sell 15,000 units? Why?
  3. How much profits will the company realize at 15,000 units based on the decision made in No. 2?
  4. If competition will drive the market price to ₱100/unit, how much profits/losses will it realize/incur?

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