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 inter- nally. Internal production could use either of two processes. One would entail a variable cost of$16 per unit and an annual fixed cost of $200,000; the other would entail a variable cost of S14 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 per unit for any annual quantity up to 30,000 units. Vendor B has a price of $22 per unit if demand is 1,000 units or less, but $18 per unit (for all units) if demand is greater. Vendor C offers a price of $21 per unit for the first 1,000 units, and $19 per unit for additional units. (LO3) a. If the manager anticipates an annual demand of 10,000 units, which alternative would be 8. best from a cost standpoint? For 60,000 units, which alternative would be best? b. Determine the range for which each alternative is best. Are there any alternatives that are never best? If so, which ones?

Explanation / Answer

Alternative 1 -

Fixed cost (FC) = 200000 $

Variable cost (VC) = 16 $/unit

Alternative 2 -

Fixed cost (FC) = 240000 $

Variable cost (VC) = 14 $/unit

Alternative 3 -

Price = 20 $/unit upto 30000 units

Alternative 4 -

Price = 22 $/unit upto 1000 units and 18 $/unit for demand >1000 units

Alternative 5 -

Price = 21 $/unit upto 1000 units and 19 $/unit for demand for additional units

a) Annual demand = 10000 units

Alternative 4 i.e. Vendor B is preferable.

Annual demand = 60000 units

Alternative 2 or alternative 4 would be preferable

b) Alternative 3 is best from 1 units to 1000 units

Alternative 4 is best from 1001 units to 60000 units

Alternative 2 is better above 60000 units

Alternative 5 is never best, similarly alternative 1 is never best.

Alternative Cost calculation Total costs 1 200000+16*10000 360000 2 240000+14*10000 380000 3 20*10000 200000 4 18*10000 180000 5 (21*1000)+(19*9000) 192000

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