Question

2. Company X is considering to produce a gear assembly which they are now purchasing from Y Supply Inc. Y supply Inc charges $4 per unit with a minimum order of 3,000 units. Company X estimates that it will cost $15,000 to set up the process line and then S1.82 per unit for labour and material. ly show the crossover point for the available alternatives. b. Mathematically, determine the range of production at which either choice is more profitable.

Answer 1

Let’s use an equation to denote production at own facility.

B1 = 15000 + 1.82A

Here B1 is the total cost, and A is the number of units produced and

Similarly if we consider the cost of ordering from Y

B2 = 4A where A >= 3000

In order to plot this graphically we need to create the chart. (I will be creating the chart on excel for simplicity. However you can create it from the equation as well)

Using the equations above, and plotting a few data points, the screenshots are shown below.

0 2 0 100 200 000 000 123456789 01234567890

To determine range of choices lets identify the equilibrium point by B1 = B2

15000 + 1.82A = 4A or,

15000 = 2.18A or,

A = 6880.7 or 6881

Below this, buying from Y is a better choice. Above this, Company X should produce it themselves.