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Operations Management: purchase a part or produce it, a cost

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1. A manager is trying to decide whether to purchase a certain part or to have it produced internally. Internal production could use either of two processes. One would entail a variable cost of $17 per unit and an annual fixed cost of $200,000; the other would entail a variable cost of $14 per unit and an annual fixed cost of $240,000. Three vendors are willing to provide the part. Vendor A has a price of $20 unit for any volume up to 30,000 units. Vendor B has a price of $22 per unit for demand of 1,000 units or less, and $18 per unit for larger quantities. Vendor C offers a price of $21 per unit for the first 1,000 units, and $19 per unit for additional units.

a. If the manager anticipates an annual volume of 10,000 units, which alternative would be the best for a cost standpoint?
b. For 20,000 units, which alternative would be best?
c. Determine the range for which each alternative is best. Are there any alternatives that are never best? Which?

Solution Summary

Excel file contains solution of a relevant costing problem.

$2.19