Question: 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 estimates that the parts cost $8 per piece.
a. Assuming that cost is the only criterion, use break-even analysis to determine whether the firm should make or buy the item. What is the break-even quantity and what is the total cost at the break-even point?
b. Calculate the total costs for both options at 20,000 units. What is the cost savings for choosing the cheaper option?