The supply manager at a dishwasher manufacturer is assessing the company should

Question

The supply manager at a dishwasher manufacturer is assessing the company should purchase the pump from a supplier or assemble the pump in-house. Forecasts suggest that 24,000 pumps are needed per year. The annual fixed costs to assemble the pumps are $250,000 per year. The variable costs per unit to assemble the pump are $25/unit. The pumps can be purchased for $32/unit.

The supply manager at a dishwasher manufacturer is assessing the company should purchase the pump from a supplier or assemble the pump in-house. Forecasts suggest that 24,000 pumps are needed per year. The annual fixed costs to assemble the pumps are $250,000 per year. The variable costs per unit to assemble the pump are $25/unit. The pumps can be purchased for $32/unit.

Explanation / Answer

Demand (D) = 24000 pumps per year

Annual fixed cost(FC) = $ 250000

Variable cost per unit to assemle the pump (VC) = $ 25 per unit

Purchase Price(P) = $ 32 per unit

a) Total cost insource = FC+ D*VC =$ 850000 per year

Total cost outsource = P*D = $ 768000 per year

b) While evaluating the options of insource or outsource, only variable cost has to be taken into consideration. The variable cost is $25 for insource as compared to $32 for outsource. So, supply manager should go for insource option.

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