Determine allowable setup cost, Advanced Statistics

A metal fabrication process uses a die-cast metal fastener at a uniform rate of 300 units per year. Currently, this item is currently purchased from an external supplier at a unit cost of $12, with an ordering cost of $30 per order. This fastener could be produced internally on a batch production basis at a variable cost of $11.20 per unit. There is sufficient capacity available to sustain a production rate of 1,000 units per year during the manufacture of this item. The firm's inventory holding cost rate is $0.25/$/year, but the setup cost for producing a batch of this metal fastener cannot be estimated accurately at this time.

(a)    What is the maximum allowable setup cost per batch for this item, such that it is more desirable (based on relevant costs alone) to produce it internally, rather than buying it from the current external source?

(b)   After conducting a thorough time study, it is estimated that the setup cost for this fastener would be $180 per production batch. In the meantime, the Vice President of Parking has issued a company-wide order requiring that the average investment in the inventory (disregarding safety stock) of any produced or purchased metal part is not to exceed $500. If this restrictive order is to be followed, should the metal fastener in question be produced internally or purchased? What is the production or procurement (as the case may be) lot size and the consequent annual total relevant cost for this fastener?

(c)    A second potential supplier for this part has offered the following price schedule:

Purchase Lot Size (Units):    1-49            50 -199           200-499           500 or More   

  Unit Price ($ per Unit):       12.20             11.98                11.80               11.50

Is your decision in part (b) affected by this new information, if the Parking VP's order is rescinded?

Posted Date: 2/25/2013 12:09:22 AM | Location : United States

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