Option 1: build a plant, investment cost = $52.5M, VC = $2/bottle
Option 2: Outsource production, VC = $2.25/bottle for first 20M bottles. $2.5/bottle for any production above 20M bottles.
Annual production level required = 40M bottles. What is the payback period of option 1 given the alternative is outsourcing? Answer: 3 years, 7.5 months.
Is there a simple way to get this answer?
Thanks, if I try to find the savings per year it is 0.25 x 20M for 1st 20 M bottles and then 0.5x20M for the next 20M bottles = $15M. Can I just divide the investment cost 52.5M by this savings (15M)? You get 3.5 years. How would you know if you need to find it on a semester by semester basis or can just divide by additional savings like you typically do for payback period calculations?
That formula works only is profitability per unit is constant over time. This is not the case. You have lower profitability for the first 20M units, and then higher profitability for the remainder. While in this case it was pretty easy to equate the 20M with the semester, but what I am actually doing is "plotting" the first 20M and then the second 20M to get to the payback.
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