Merrimac Manufacturing has always purchased a certain component part from a supplier on the East Coast for $50 per part. The supplier is reliable and has maintained the same price structure for years. Recent improvements in operations and reduced product demand have cleared up some capacity in Merrimac’s own plant for producing component parts. The particular part in question can be produced internally by Merrimac at $20 per part, with an annual fixed investment of $27,000.

a) Over what range (quantity) of product would each of the two options be the preferred one?

b) As an alternative, a new supplier located nearby is offering to produce parts on the following cost schedule. For the first 100 parts, the cost is $52 per part. For each part in excess of 100, the cost per unit drops to $46 per part. Considering just the two suppliers, over what range (quantity) of product would each supplier be the preferred one?

c) The company is now considering only these two options: the new supplier with the cost information provided in part b) and producing it internally. Considering these two options, over what range (quantity) of product would each option be the preferred one?

Answer rating: 100% (QA)

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