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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 30,000 units. Vendor B has a price of $22 per unit for
demand of 1,000 units or less, 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?
b. Determine the range for which each alternative is best. Are there any alternatives that are never
best? Which?
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It is SO SIMPLE !! SO EASY !!!
n= 10,000 n= 20,000
Internal production, Process 1: f(n) = 200,000 + 17n 370,000 540,000
Internal production, Process 2: f(n) = 240,000 + 14n 380,000 520,000
Vendor A: f(n) = 20n 200,000 400,000
Vendor B: f(n)= 22n, if n < 1000; = 18n, if n > 1000 180,000 360,000
Vendor C: f(n)= 21n, if n < 1000; + 19(n-1000) after 1000 192,000 382,000
Answers to question a): For n = 10,000 vendor B is the best option. For n = 20,000 vendor B is the best, again.
I was armed with my Excel in my computer.