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 per unit for any volume up to its maximum capacity of 30,000 units. Vendor B has a price of $22 per unit for demand less than 1,000 units, 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 best from a cost standpoint? For 20,000 units, which alternative would be best?
| TC for 10,000 units |
|
TC for 20,000 units |
|
| Int. 1: |
$ |
Int. 1: |
$ |
| Int. 2: |
$ |
Int. 2: |
$ |
| Vend A |
$ |
Vend A |
$ |
| Vend B |
$ |
Vend B |
$ |
| Vend C |
$ |
Vend C |
$ |
| Int.1Int.2Vendor AVendor CVendor B is the best from a cost standpoint. |
Int.2Vendor BInt.1Vendor AVendor C is the best from a cost standpoint. |
b. Determine the range for which each alternative is best.
| Range |
Optimal Choice |
| 1 to 999 |
Int.1Vendor AInt.2Vendor BVendor C |
| 1,000 to 59,999 |
Vendor BInt.2Int.1Vendor CVendor A |
| 60,000 or more |
Vendor CInt.1Vendor BVendor AInt.2 |