Question

A company must decide if it will make or buy an item it needs. The company can make the item for $10 per unit, but must invest $15,000 in tooling to do so. An outside firm has quoted a total price of $12 per unit to supply the quantity required (assume their fixed costs are included in the quoted price). Which alternative should be selected if annual requirements are 5,000 units

Answer 1

After performing a cost analysis for producing 5,000 units, it would cost the company $65,000 to make the item and $60,000 to buy it, making buying the more cost-effective option.

Step-by-step explanation:

The student's question regarding whether to make or buy an item can be assessed using a cost analysis. If the company makes the item, the cost will be $10 per unit with an additional fixed investment of $15,000 in tooling, while buying it outright will cost $12 per unit. Assuming the annual requirement is 5,000 units:

Make: The cost will be (5,000 units × $10/unit) + $15,000 = $65,000.

Buy: The cost will be 5,000 units × $12/unit = $60,000.

Therefore, it is less expensive for the company to buy the item than to make it.