Problem 5-8

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:	$	Int. 1:	$
Int. 2:	$	Int. 2:	$
Vend A	$	Vend A	$
Vend B	$	Vend B	$
Vend C	$	Vend C	$
(Click to select)Vendor CVendor BVendor AInt.1Int.2 is the best from a cost standpoint.		(Click to select)Int.1Int.2Vendor AVendor BVendor C is the best from a cost standpoint.

b.	Determine the range for which each alternative is best.

Range	Optimal Choice
1 to 999	(Click to select)Vendor BInt.1Int.2Vendor CVendor A
1,000 to 59,999	(Click to select)Vendor BVendor CInt.1Int.2Vendor A
60,000 or more	(Click to select)Vendor CInt.1Int.2Vendor BVendor A