Hoosier Manufacturing needs to source a specific component for a new product and is considering two options: buy directly from a supplier or produce it in-house. The demand for the item is 12,000 units per year.

Hoosier estimates that its holding cost is 25% per year, and has received the following quotes.

Option 1: Buy from a supplier. PrecisionWorks has quoted Hoosier a price of $40 per unit. Because the part requires special tooling, PrecisionWorks also requires a flat fee of $900 per batch. Hoosier estimates that they will incur an additional $100 per order plus $2.75 per unit in transportation costs.

Option 2: Produce in-house. Hoosier estimates that it can produce this item at a rate of 90 per day (there are about 250 working days per year). Because Hoosier is not as efficient as PrecisionWorks, tooling will cost Hoosier $4,000 per batch, and each unit cost $42 to produce in-house.

1. 1. Evaluate the average annual cost for each option. Which option should Hoosier choose? Be sure to carefully apply the EOQ or EPQ formula for each option.

2. What unit cost would PrecisionWorks have to charge for Hoosier to consider changing options?