## Supplier Selection — Indifference Point

When choosing between suppliers with different cost structures (one with low price but high fixed charges, another with higher price but no/low fixed charges), find the quantity at which both cost the same — the indifference point.

### Formula

$$\text{Indifference Point (units)} = \dfrac{\text{Difference in Fixed Cost}}{\text{Difference in Variable Cost per unit}}$$

### Decision rule

If expected quantity is...	Choose...
Greater than indifference point	The high-fixed-cost / low-variable-cost supplier
Less than indifference point	The low-fixed-cost / high-variable-cost supplier

Intuition: A high fixed charge only pays off when spread over large volumes (low per-unit price wins at scale); for small volumes, avoid the fixed charge and take the higher per-unit price.

Worked example

### Example 1

Indifference point: Supplier A — price ₹50/unit, no fixed charge. Supplier B — price ₹40/unit, fixed charges ₹10,000 p.a.

Difference in fixed cost = ₹10,000; difference in variable cost = ₹50 − ₹40 = ₹10/unit.

Indifference Point = 10,000 ÷ 10 = 1,000 units.

If expected demand > 1,000 units → choose Supplier B (high fixed, low variable).
If expected demand < 1,000 units → choose Supplier A (no fixed, higher variable).

⚠️ Common exam mistakes

Inverting the decision rule — the high-fixed-cost supplier wins at HIGH volumes, not low.
Using total fixed cost instead of the DIFFERENCE in fixed cost between the two suppliers.
Using one supplier's variable cost rather than the DIFFERENCE in variable cost per unit in the denominator.
Ignoring fixed charges entirely and comparing only per-unit prices.

Reference:

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Supplier Selection — Indifference Point Analysis

Worked example

⚠️ Common exam mistakes