Question 1063303: 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?
Answer by ikleyn(52781)   (Show Source):
You can put this solution on YOUR website! .
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.
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