Examples

Make or buy decision

1. A manufacturer of car buys a certain components at Rs. 20 each. In case he

makes it himself, his fixed and variable cost would be Rs. 24,000 and Rs.8 per
component respectively.

BEP = Fixed Cost/Purchase Price – Variable Cost

2. Expand or not

A company has the capacity to produce goods worth of Rs. 40 crores a year. For
this, it has incurred a fixed cost of Rs.10 crores, the variable costs being 60% of
the sales revenue.

Now the company is planning to incur an additional Rs. 6 crores in fixed costs to
expand its production capacity from Rs. 40 crores to Rs.60 crores. The survey
shows that the firm’s sales can be increased from Rs. 40 crores to Rs. 50 crores.
Should the firm go in for expansion?