Question

# Given the following data and an estimated demand of 10,000 units annually: MAKE BUY PROCESS A...

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

Solution:

1) Make:

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

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

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

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.