# Supplier Selection Using the Indifference Point
When choosing between two suppliers with different cost structures — one charging a higher variable price but no fixed charge, the other charging a lower variable price but a fixed annual charge — we find the indifference point: the quantity at which the total cost from both suppliers is equal.
## Formula
$$\text{Indifference Point (units)} = \frac{\text{Fixed Cost}}{\text{Difference in Variable Cost per Unit}}$$
## Decision Rule
Once the indifference point is known, compare it with the expected quantity to be purchased:
| If Expected Quantity is | Choose |
|---|---|
| Greater than the indifference point | The high fixed cost / low variable cost supplier |
| Less than the indifference point | The low fixed cost / high variable cost supplier |
Intuition: A fixed charge is spread over more units as volume rises, so a high-fixed-cost supplier becomes cheaper per unit at large volumes. At low volumes the fixed charge cannot be justified, so the no-fixed-cost supplier wins.