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Make or Buy analysis

Lawson Industries (LI) makes portable CD Players. A new model has been developed that requires a new design of a display unit. LI is contemplating whether to buy the units from a supplier, to produce the units while using a manual assembly system, or to produce the units while using an automated assembly system.

Buy Manual Automated

Annual Volume 100,000 100,000 100,000

Fixed cost per year --- $300,000 $500,000

Variable cost per unit $10 $8 $7

a. What should LI do - buy, produce with manual assembly, or produce with automated assembly?

b. Would your answer change if 150,000 units were needed annually?

c. What other considerations would be important in this decision?

Solution Preview

Here it should buy as the total cost of the buying (100000*10=10 lakh) is less than the manufacturing( Assuming full capacity is one lakh) : manual (300000+8*100000=1100000) and automated it is (500000+7*100000=12lakh)
If 150000 units are required then the:
it will be ...

Solution Summary

This provides Make or Buy analysis