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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 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 $19 per unit for additional units. |
| a. |
If the manager anticipates an annual volume of 10,000 units, which alternative would be best from a cost standpoint? For 20,000 units, which alternative would be best? (Omit the “$” sign in your response.) |
| TC for 10,000 units | TC for 20,000 units | ||
| Int. 1: | $ is the best from a cost standpoint. | is the best from a cost standpoint. | |
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| b. |
Determine the range for which each alternative is best. |
| Range | Optimal Choice |
| 1 to 999 | |
| 1,000 to 59,999 | |
| 60,000 or more | |
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