Question

GOT Manufacturing purchases a key component of one of its products from a local supplier. The current purchase price is $1,513 per unit. Annual component usage should increase from 150 to 750 units. Emphasis on reliability has prompted management to consider making the component in-house, rather than to continue buying it from the supplier. Fixed costs would increase by about $40,000 per year for the new equipment and tooling needed. The cost of raw materials and variable overhead would be about $1,100 per unit, and labor costs would be $300 per unit produced. Since GOT would be ordering 750 units instead of 150, they can count on a discount from the supplier. The discount of at least $ _____ would make the "buy" decision better than the "make" alternative if reliability is at least parity. (Enter your response rounded to the nearest whole number.)

Answer 1

Answer:

The discount of at least $  44751 would make the "buy" decision better than the "make" alternative if reliability is at least parity. Because at discount more than 44751 will make the make cost higher than the but cost. If reliability is not an issue , then buy option will be preferred if above mentioned discount is given by the supplier.

Refer the discount cost to be given by supplier as below

Buy Cost to Company			Make Cost to Company
Unit Purchase Price	$              1,513		Fixed Cost per Year	$         40,000
Yearly Volume	150		New Volume for this year	750
New Volume for this year	750		Unit (Raw Material Cost + Overhead Cost)	$           1,100
Yearly Purchase Expense / Purchase cost to company =New Volume * Unit Pur Price	$      1,134,750		Total (Raw Material Cost + Overhead Cost) = New Volume * Unit Cot (RM + Overhead)	$       825,000
			Unit Labor Cost	$              300
			Total Labor Cost = Unit labor Cost * New Volume	$       225,000
			Total Cost ( Labor+ RM + Overhead+ Fixed)	$   1,090,000
Difference between the Buy Cost - Make Cost = $ 1,134,750 - $ 1,090,000 = $ 44,750