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Operation Management Equation

(Use this information for the following to questions) A manufacturing plant needs to acquire a new type of part for use in assembling its primary end-item product. It has three options for acquiring the part: it can buy the part from an outside vendor, or manufacture it in-house on one of two different machines it can buy. The up front cost for equipment purchase, and the per-unit variable cost of each option is shown below.

Option Equipment Cost Per-unit variable cost
Purchase from vendor N/A $ 150
Make on standard machining equipment $ 120,000 $ 75
Make on computer-controlled machining equipment $ 250,000 $ 20

1- They forecast demand of 1200 of these parts, and assume the value of any purchased equipment at the end of the project will be negligible (the equipment has no salvage value). Which method should they use?

2- At what level of demand does it become more efficient to make the parts on the computer-controlled equipment than on the standard equipment (the break-even point between the two options)?


Solution Preview

1. First you need to set up an equation to see how much it would cost using each different method:
<br>Vendor: 150x
<br>Stand. Mach.: 120,000+75x
<br>Comp. Cont: 250,000+20x
<br>X represents how many parts we would make and as given in the problem it ...