Question

A manufacturer has identified the options for acquiring a machined part. It can make the part on a standard lathe for $250 per unit (including materials). It can make the part on a numerically controlled lathe for $150 per unit (including materials). It can make the part on a machining center for $50 per unit (also including materials). The manufacturer can acquire a standard lathe for $10,000. It could acquire a numerically controlled lathe for $100,000. A machining center would cost $350,000. It has also found that it can purchase the part for $350 per unit. If the demand is 750 units, which method should be used

Answer 1

From the analysis below, the cheapest option is option 2 which is to produce the machine part at $263.33 per unit using using standard lathe. Therefore, the method that should be used is to make the part on a standard lathe.

Step-by-step explanation:

This can be determined by comparing the total cost per unit of the machine part of each of the options and select the lowest as follows:

Option 1: Purchase of the part

Total cost per unit if purchase = $350

Option 2: Total cost per unit using standard lathe

This can be calculated as follows:

Demand = 750 units

Cost per unit (including materials) of making the part on standard lathe = $250 per unit

Acquisition cost of a standard lathe = $10,000

Acquisition cost per unit of a standard lathe = Acquisition cost of a standard lathe / Demand = $10,000 / 750 = $13.33

Total cost per unit of standard lathe = Cost per unit (including materials) of making the part on standard lathe + Acquisition cost per unit of a standard lathe = $250 + $13.33 = $263.33 per unit

Option 3: Total cost per unit using numerically controlled lathe

This can be calculated as follows:

Demand = 750 units

Cost per unit (including materials) of using numerically controlled lathe = $150 per unit

Acquisition cost of a numerically controlled lathe = $100,000

Acquisition cost per unit of a numerically controlled lathe = Acquisition cost of a using numerically controlled lathe / Demand = $100,000 / 750 = $133.33

Total cost per unit of numerically controlled lathe = Cost per unit (including materials) of using numerically controlled lathe + Acquisition cost per unit of a numerically controlled lathe = $150 + $133.33 = $283.33 per unit

Option 4: Total cost per unit using machining center

This can be calculated as follows:

Demand = 750 units

Cost per unit (including materials) of using machining center = $50 per unit

Acquisition cost of a machining center = $350,000

Acquisition cost per unit of a machining center = Acquisition cost of a using machining center / Demand = $350,000 / 750 = $466.67

Total cost per unit of machining center = Cost per unit (including materials) of using machining center + Acquisition cost per unit of a machining center = $50 + $466.67 = $516.67 per unit

Conclusion

From the above, the cheapest option is option 2 which is to produce the machine part at $263.33 per unit using using standard lathe. Therefore, the method that should be used is to make the part on a standard lathe.