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The Green Machine Manufacturing Company has the option to make or buy a component part for one of its lawnmowers. The annual requirement is 25,000 units. A supplier is able to supply the parts for $12.25 per piece. Green Machine estimates that it will cost $700 to prepare the contract with the supplier. To make the parts in-house, Green Machine must invest $25,000 in capital equipment. They estimate it will cost S9.00 per piece to produce the part in-house. Carry all calculations out to two decimal places. If the demand is 25,000 units, should Green Machine make or buy the part? A. Buy the part B. Make the part C. Both D. Neither E. Not enough information
Expert Answer
Annual Requirement = 25,000 units
For buy option:
Ordering cost = Fixed cost = $700
Purchase cost per unit = Variable Cost = $12.25
Annual Cost of buy option = $700 + ($12.25)Q = 700 +(12.25)(25000)
Annual Cost of buy option = $306,950
For Make option:
Machine cost = Fixed cost = $25,000
Production Cost per unit = Variable Cost = $9.00
Annual Cost of Make option = $25,000 + ($9)Q = 25,000 + (9)(25000)
Annual Cost of Make option = $250,000
Since the annual cost of Make option is less than buy option, manager should make the parts if demand is estimated to be 25,000 units
ANS: B. Make the part
