Question

The supply manager at a dishwasher manufacturer is assessing the company should purchase the pump from a supplier or assemble the pump in-house. Forecasts suggest that 16,000 pumps are needed per year. The annual fixed costs to assemble the pumps are $170,000 per year. The variable costs per unit to assemble the pump are $14/unit. The pumps can be purchased for $24/unit. a. Compute the total annual cost for insourcing and outsourcing the pumps.

Answer 1

Answer:

buy option 384,000

make 394,000

Purchase the pumps is a better deal as it saves 10,000 dollars.

Explanation:

This is a case of make or buy, we need to compare each alternative and pick the lower cost:

buy option (outsourcing)

16,000 pumps x 24 = 384,000

make option (insourcing)

variable cost x units + fixed cost

14 x 16,000 + 170,000 = 394,000

buy is better as it saved 10,000 cost.