Let\'s pretend you are a junior buyer. Suppose that a make-buy decision is being
ID: 2580884 • Letter: L
Question
Let's pretend you are a junior buyer. Suppose that a make-buy decision is being made for an injection molded plastic part. In other words, do you make it yourself or do you outsource it to a supplier? The fixed costs of making this part are $200,000. The variable cost to make this part is $0.40. The lowest bid received from the pool of qualified suppliers is $0.75 per part. What is the break-even quantity? Hint: It is the point where the total cost to manufacture equals the total cost to purchase. The information below might also help. Please interpret your results. Meaning, what decision should you make based on if you need more or less than the break even quantity?
Explanation / Answer
Answer
If produced: Cost = $0.4 per unit + $200000
If purchased: Cost = $0.75 per unit
0.4x + 200000 = 0.75x
200000 = 0.75x – 0.4x
200000 = 0.35x
200000 / 0.35 = x
x = 571429 units (Approx)
--- If quantity is less than 571429 units, one should buy it and not produce it.
---If quantity is more than 571429 units, it should be self-produced and not bought from outside.
---Proving the above points with assumptions:
Case 1
Case 2
Case 3
If Units are less than BE units
If units are equal to BE Units
If units are more than BE Units
Units
500000
571429
600000
Variable Cost [Units x $0.4]
200000
228571.6
240000
Fixed Cost
200000
200000
200000
Total Cost if produced
400000
428571.6
440000
Purchase Cost [Units x $0.75]
375000
428571.75
450000
Decision
Purchase as purchase cost is lower
Break Even case, either buy or produce, cost is same
Produce, as cost to produce is less
If Units are….
Decision
< 571429 units
Purchase or Buy
equal to 571429 units
Either Buy or Produce
>571429 units
Produce
Case 1
Case 2
Case 3
If Units are less than BE units
If units are equal to BE Units
If units are more than BE Units
Units
500000
571429
600000
Variable Cost [Units x $0.4]
200000
228571.6
240000
Fixed Cost
200000
200000
200000
Total Cost if produced
400000
428571.6
440000
Purchase Cost [Units x $0.75]
375000
428571.75
450000
Decision
Purchase as purchase cost is lower
Break Even case, either buy or produce, cost is same
Produce, as cost to produce is less
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