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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?

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Solution Summary

Excel file contains solution of a relevant costing problem.

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