A night vision goggle manufacturer is evaluating a make-versus-purchase situatio

Question

A night vision goggle manufacturer is evaluating a make-versus-purchase situation for a component used in its low-priced products.  The component can be purchased at a variable wholesale price of P=1200+50y where y is the number of items.  Alternatively, the component can be produced with a direct material cost of $17 per item, and direct labor cost of $38 per item.  The manufacturing overhead is allocated at 150% of direct labor cost per item. How much will it cost to purchase the component if the company requires on average 159 items each year?

Explanation / Answer

P=1200+50y

hence, if the company buys159 items the cost incurred is 1200+50*159=$9150

on the other hand if it produces the item the cost incurred is 17y+38y+1.5*38y=112y=$17808

thus it is favourable for the company to buy the item at a price of $9150.

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