A Las Vegas, Nevada, manufacturer has the option to make or buy one of its component parts. The annual requirement is 20,000 units. A supplier is able to supply the parts for $10 per piece. The firm estimates that it costs $600 to prepare the contract with the supplier. To make the parts in-house, the firm must invest $50,000 in capital equipment, and the firm estimates that it costs $8 per piece to make the parts in-house.
Assuming that cost is the only criterion, use breakeven analysis to determine whether the firm should make or buy the item.
1. What is the breakeven quantity?
2. Should the manufacturer Make or Buy?
3. What is the cost savings using your decision in number 2 (above)? Show the total cost for each scenario then the savings amount.