Suppose that a firm has the option to make or buy a part. Its annual requirement is 11,000 units. A supplier is able to supply the part at $6 per unit. The firm estimates that it costs $800 to prepare the contract with the supplier. To make the part, the firm must invest $29,000 in equipment, and the firm estimates that it costs $3 per unit to make the part. COSTS MAKE OPTION BUY OPTION Fixed Cost $29,000 $800 Variable Cost $3 $6 Annual Requirement = 11,000 units 4. What is the total cost for the buy option? Round your answer to the nearest dollar. 5. What is the cost difference (make – buy)? Round your answer to the nearest dollar. Use the minus sign to enter a negative difference, if any. 6. To obtain the lowest production cost, should the firm make or buy the part?
Suppose that a firm has the option to make or buy a part. Its annual requirement is 11,000 units. A supplier is able to supply the part at $6 per unit. The firm estimates that it costs $800 to prepare the contract with the supplier. To make the part, the firm must invest $29,000 in equipment, and the firm estimates that it costs $3 per unit to make the part. COSTS MAKE OPTION BUY OPTION Fixed Cost $29,000 $800 Variable Cost $3 $6 Annual Requirement = 11,000 units 4. What is the total cost for the buy option? Round your answer to the nearest dollar. 5. What is the cost difference (make – buy)? Round your answer to the nearest dollar. Use the minus sign to enter a negative difference, if any. 6. To obtain the lowest production cost, should the firm make or buy the part?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Suppose that a firm has the option to make or buy a part. Its annual requirement is 11,000 units. A supplier is able to supply the part at $6 per unit. The firm estimates that it costs $800 to prepare the contract with the supplier. To make the part, the firm must invest $29,000 in equipment, and the firm estimates that it costs $3 per unit to make the part.
| COSTS | MAKE OPTION | BUY OPTION | ||||
| Fixed Cost | $29,000 | $800 | ||||
| Variable Cost | $3 | $6 | ||||
| Annual Requirement = 11,000 units |
4. What is the total cost for the buy option? Round your answer to the nearest dollar.
5. What is the cost difference (make – buy)? Round your answer to the nearest dollar. Use the minus sign to enter a negative difference, if any.
6. To obtain the lowest production cost, should the firm make or buy the part?
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