A manager is trying to decide whether to purchase a certain part or to have it p

Question

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? For 20,000 units, which alternative would be best?

b. Determine the range for which each alternative is best. Are there any alternatives that are never best? Which?

Explanation / Answer

*NOte: Procuring from Vendor-B is always best as its cost per unit is lower compared to Internal production and procuring from other two vendors.

If any doubt kindly revert.

Particulars 10000 uts 20000 uts 30000 uts Internal production Process-1 Variable cost 170000 340000 510000 (10000uts x 17) (20000uts x 17) (30000uts x 17) Fixed cost 200000 200000 200000 Total cost 370000 540000 710000 cost per unit $37 $27 $23.66666667 Process-2 Variable cost 140000 280000 420000 (14 x 1000uts) (14 x 20000) (14 x 30000) Fixed cost 240000 240000 240000 Total cost 380000 520000 660000 cost per unit $38 $26 $22 Purchase from outside Vendor-A $20 $20 $20 Vendor-B(large qtty) $18 $18 $18 Vendor-C Net cost per First 1000 Uts 21000 21000 21000 1000 x 21 Cost over 1000 uts. 171000 361000 551000 (9000 x 19) (19000 x 19) Total cost 192000 382000 572000 Cost per ut. $19.2 $19.1 $19.06666667

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