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Production Costs - Samco Manufacturing

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Samco Manufacturing has always purchased a certain component part from a supplier on the East Coast for $50 per part. The supplier is reliable and has maintained the same price structure for years. Recent improvements in operations and reduced product demand have cleared up some capacity in Samco's own plant for producing component parts. The particular part in question can be produced at $20 per part, with an annual fixed investment of $27,000.

a) Over what range (quantity) of product would each production option be preferred?

b) As an alternative, a new supplier located nearby is offering to produce parts on the following cost schedule. For the first 100 parts, the cost is $52 per part. For each part in excess of 100, the cost per unit drops to $45 per part. Considering just the two suppliers, over what range (quantity) of product would each supplier by preferred?

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Solution Summary

The production costs for Samco Manufacturing is examined. Which production option is preferred is determined.

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a) Let's say that Samco buys x units, and at this point, buying from the supplier costs the same as producing the parts, how much is x?

Supplier: since each unit costs 50, x units will cost 50x,

Producing: each unit costs 20 and there is a fixed cost, total would be 27000 + 20x.

Equating the two ...

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