Question: The Water Sports Company soon will be producing and marketing a new model line of motor boats. The production manager, Michael Jensen, now is facing a make-or-buy decision regarding the outboard motor to be installed on each of these boats. Based on the total cost involved, should the motors be produced internally or purchased from a vendor? Producing them internally would require an investment of $1 million in new facilities as well as a production cost of $1,600 for each motor produced. If purchased from a vendor instead, the price would be $2,000 per motor.
Michael has obtained a preliminary forecast from the company's marketing division that 3,000 boats in this model line will be sold.
a) Use spreadsheets to display and analyze Michael's two options. Which option should be chosen?
b) Michael realizes from past experience that preliminary sales forecasts are quite unreliable, so he wants to check on whether his decision might change if a more careful forecast differed significantly from the preliminary forecast. Determine a break-even point for the production and sales volume below which the buy option is better and above which the make option is better.