Mystique Manufacturing needs to source a specially machined component for its new product and is considering two options: buy from a supplier or produce it in-house. The current demand for the component is 10,000 units per year.

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

Option 1: Buy from a supplier. PrecisionWorks has quoted Mystique a price of $41 per unit. Because the part requires special tooling, PrecisionWorks also requires a flat fee of $900 per batch. Mystique estimates that transportation will cost $100 per order plus $2.75 per unit.

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

a) What is the lot size that Mystique would use if they purchase from PrecisionWorks?

b) What is the total annual cost if Mystique sources from PrecisionWorks?

c) What batch size should Mystique use if they produce in-house? Hint: this is a production problem, not an ordering problem.

d) What is the total annual cost if Mystique produces in-house?

e) If PrecisionWorks is willing to negotiate on the unit price, what price would be needed to be competitive with the in-house production (competitive means the same annual cost). Use GoalSeek or guess and check.