Question

Hoosier Manufacturing needs to source a specific component for a new product and is considering two options: buy directly from a supplier or produce it in-house. The demand for the item is 12,000 units per year.

Hoosier estimates that its holding cost is 25% per year, and has received the following quotes.

Option 1: Buy from a supplier. PrecisionWorks has quoted Hoosier a price of $40 per unit. Because the part requires special tooling, PrecisionWorks also requires a flat fee of $900 per batch. Hoosier estimates that they will incur an additional $100 per order plus $2.75 per unit in transportation costs.

Option 2: Produce in-house. Hoosier estimates that it can produce this item at a rate of 90 per day (there are about 250 working days per year). Because Hoosier is not as efficient as PrecisionWorks, tooling will cost Hoosier $4,000 per batch, and each unit cost $42 to produce in-house.

Question: What unit cost would PrecisionWorks have to charge for Hoosier to consider changing options? To the nearest cent.

Answer 1

To calculate the break-even unit cost for Precision Works, we need to consider in-house production costs and then factor in Precision Works' per unit cost, batch fees, order charges, and transportation costs. However, a specific unit cost calculation is not possible without the batch size, Q, for intervals at which Hoosier would order from Precision Works.

Step-by-step explanation:

To determine what unit cost Precision Works would have to charge for Hoosier Manufacturing to consider changing options, we need to calculate the total costs for the in-house production and then calculate the maximum unit cost from Precision Works that would make the total cost equal to in-house production.

For in-house production, the total cost involves both a fixed tooling cost and a variable production cost. With a tooling cost of $4,000 and a variable cost of $42 per unit for 12,000 units, the total in-house production cost is:

Tooling Cost: $4,000

Production Cost (12,000 units x $42/unit): $504,000

Total In-House Production Cost: $4,000(tooling) + $504,000(production) = $508,000

To find the break-even unit cost for Precision Works, we must add their quoted unit cost, the per batch fee, the per order charge, and the transportation cost per unit. Let Q be the order quantity (batch size), then:

1. Determine the number of orders : Number of Orders = Total Annual Demand / Q
2. Calculate the annual batch fees : Total Batch Fees = Number of Orders * Batch Fee
3. Calculate the annual order charges : Total Order Charges = Number of Orders * Order Charge
4. Calculate the total transportation cost : Total Transportation Cost = Total Annual Demand * Transportation Cost per Unit
5. Finally, calculate the break-even unit cost where Total Cost = Total In-House Production Cost.

However, since we do not have the batch size Q provided or a way to determine the optimal Q for the external supplier, we cannot provide a specific unit cost. Hence, with the given information, a precise unit cost calculation is not possible without additional data.