Question

Given the following data and an estimated demand of 10,000 units annually:

	MAKE		BUY
	PROCESS A	PROCESS B
Variable costs per unit	$50	$52
Annual fixed costs	$40,000	$36,000
Transportation cost per unit			$2

a. Determine the total annual cost of making and of buying, and make a decision on which to select.

b. If for an expenditure of $8,000 annually you can lower the

Answer 1

Solution:

1) Make:

Process A: 10,000*$50 + $40,000 = 540,000

Process B: 10,000*52 + $36,000 = 556,000

Buy:

Process A: 10,000*$2 + $40,000 = 60,000

Process B: 10,000*$2 + $36,000 = 56,000

Thus, a firm should select Process B for buying as Firm A it will be able to save 480,000; and firm B will save 500,000.

2) Make:

Process A: 8,000*$50 + $40,000 = 440,000

Process B: 8,000*52 + $36,000 = 452,000

Buy:

Process A: 8,000*$2 + $40,000 = 40,000

Process B: 8,000*$2 + $36,000 = 36,000

Thus, a firm should select Process B for buying as Firm A it will be able to save 384,000; and firm B will save 400,000.