Merrimac Manufacturing has always purchased a certain component part from a supp
ID: 407491 • Letter: M
Question
Merrimac Manufacturing has always purchased a certain component part from a supplier on the East Coast for $50 per part. The supplier is reliable and has maintained the same price structure for years. Recent improvements in operations and reduced product demand have cleared up some capacity in Merrimac’s own plant for producing component parts. The particular part in question can be produced internally by Merrimac at $20 per part, with an annual fixed investment of $27,000.
a) Over what range (quantity) of product would each of the two options be the preferred one?
b) As an alternative, a new supplier located nearby is offering to produce parts on the following cost schedule. For the first 100 parts, the cost is $52 per part. For each part in excess of 100, the cost per unit drops to $46 per part. Considering just the two suppliers, over what range (quantity) of product would each supplier be the preferred one?
c) The company is now considering only these two options: the new supplier with the cost information provided in part b) and producing it internally. Considering these two options, over what range (quantity) of product would each option be the preferred one?
Explanation / Answer
Answer :- A The Merrimac manufacturing has two options, first purchase part at $50 per unit or produce that part internally at cost $20 per unit with annual fixed cost $27000, Now we find out at what range we should buy or produce.
if the company manufacturing till 900 units, then the cost will be same in both options. if company use more than 900 units, then company should produce product internally, or if company use product less than 900 units, then company should purchase that part.
Answer:- B Now there is new supplies in the market, which offers new price, till 100 per unit he charged $52 per unit and after 100 units he charge $46 per unit., so now there is again two option for Merrimac that from which supplier he will purchase.
in this two option are there, at unit 150, both supplier cost same, but if demand of that part is less than 150 units, then purchase from supplier 1st and if the demnad is more than 150 units purchase from 2nd supplier.
Answer:- C Now we have two options, purchase from new supplier or produce internally, so suppose the units.
At the units 1015, company will manufacture internally, after demand of more units, then purchase from new supplier will be good.
Particulars Option A Purchased Option B Produced Option A Purchased Option B Produced Option A Purchased Option B Produced Option A Purchased Option B Produced Units 1000 units 1000 units 800 units 800 units 750 units 750 units 900 units 900 units Price per unit $50 $20 $50 $20 $50 $20 $50 $20 Fixed cost $27,000 $27,000 $27,000 $27,000 cost incurred amount $50,000 $47,000 $40,000 $43,000 $37,500 $42,000 $45,000 $45,000