1. The manager of Green Daisy Inc. is in the process of deciding whether to make
ID: 2715132 • Letter: 1
Question
1. The manager of Green Daisy Inc. is in the process of deciding whether to make or buy carburetors for its power lawn mowers. If Green Daisy decides to manufacture the carburetor, it could utilize one of two manufacturing processes. The first process would entail a variable cost of $17 per unit and an annual fixed cost of $200,000, while the second process would entail variable cost of $14 per unit and an annual fixed cost of $240,000. The manager knows of three vendors who are capable and willing to provide the carburetor. Vendor A charges $20 per unit for any volume up to 30,000 units and cannot supply Green Daisy’s need for volume above 30,000 units due to its capacity restrictions. Vendor B offers a price of $22 per unit for a demand of 1,000 units or less and $18 per unit for each unit above the 1,000 units. Vendor C’s price is $21 per unit for the first 1,000 units and $19 per unit for any additional units. The manager is unsure about what the demand is going to be for power lawnmowers. a) If the demand is forecasted to be 10,000, 20,000, 28,000, or 60,000 units, which alternative would be best from a cost standpoint? c) What is the break-even volume of internal process 2 if we use the best price external option?
Explanation / Answer
Best option would be vendor 2 in all the scenarios save the 60000 unit level from a cost per unit stand point.
At production level of 59000, we reach the indifference point.
Cost per unit from process 2 and from vendor 2 are both $18.07 per unit.
Break even volume of internal process 2 is 59000 units
Hence for a production level below 59000 units the company has to use vendor 2 and for a production level above 59000 units, they have to use internal process 2.
Workings at each production level are shown below
Demand in units: 10,000 PROCESS 1 PROCESS 2 VENDOR 1 VENDOR 2 VENDOR 3 Particulars rate/unit cost rate/unit cost rate/unit cost rate/unit cost rate/unit cost Variable Cost $17 $1,70,000 $14 $1,40,000 $20 $2,00,000 $18 $1,62,000 $19 $1,71,000 Fixed Cost $2,00,000 $2,40,000 $0 $22 $22,000 $21 $21,000 Cost Per Unit $37.00 $38.00 $20.00 $18.40 $19.20 Demand in units: 20,000 PROCESS 1 PROCESS 2 VENDOR 1 VENDOR 2 VENDOR 3 Particulars rate/unit cost rate/unit cost rate/unit cost rate/unit cost rate/unit cost Variable Cost $17 $3,40,000 $14 $2,80,000 $20 $4,00,000 $18 $3,42,000 $19 $3,61,000 Fixed Cost $2,00,000 $2,40,000 $0 $22 $22,000 $21 $21,000 Cost Per Unit $27.00 $26.00 $20.00 $18.20 $19.10 Demand in units: 28,000 PROCESS 1 PROCESS 2 VENDOR 1 VENDOR 2 VENDOR 3 Particulars rate/unit cost rate/unit cost rate/unit cost rate/unit cost rate/unit cost Variable Cost $17 $4,76,000 $14 $3,92,000 $20 $5,60,000 $18 $4,86,000 $19 $5,13,000 Fixed Cost $2,00,000 $2,40,000 $0 $22 $22,000 $21 $21,000 Cost Per Unit $24.14 $22.57 $20.00 $18.14 $19.07 Demand in units: 60,000 PROCESS 1 PROCESS 2 VENDOR 1 VENDOR 2 VENDOR 3 Particulars rate/unit cost rate/unit cost rate/unit cost rate/unit cost rate/unit cost Variable Cost $17 $10,20,000 $14 $8,40,000 Not Possible Due to $18 $10,62,000 $19 $11,21,000 Fixed Cost $2,00,000 $2,40,000 Capacity Constraints $22 $22,000 $21 $21,000 Cost Per Unit $20.33 $18.00 $18.07 $19.03 Demand in units: 59,000 BREAK EVEN POINT PROCESS 1 PROCESS 2 VENDOR 1 VENDOR 2 VENDOR 3 Particulars rate/unit cost rate/unit cost rate/unit cost rate/unit cost rate/unit cost Variable Cost $17 $10,03,000 $14 $8,26,000 Not Possible Due to $18 $10,44,000 $19 $11,02,000 Fixed Cost $2,00,000 $2,40,000 Capacity Constraints $22 $22,000 $21 $21,000 Cost Per Unit $20.39 $18.07 $18.07 $19.03Related Questions
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