Buy or Make

Problem 1 Price of bought out item is Rs 12 per piece. The item is proposed to be manufactured by the organization using any of the following 3 machine Options : Machine option A B C Make the following : (i) Decision Rule on Buy or make at various production ranges, (ii) Best option for total Annual Production target 10,000 pieces/month for next 6 years (iii)Draw a Cost Comparison graph. Unit Variable Cost (Rs per unit) 7.5 5.0 0.5 Total Annual Fixed Cost ( Rs) 90,000 350,000 930.000

Solution 1

Buy or Make

If total production is x pieces per year, Total cost per year of : Buy option, Cb = 12 x (i) Make A option, Cma = 7.5 x + 90,000 (ii) Make B option Cmb = 5.0 x + 350,000 (iii) Make C option Cmc = 0.5 x + 930,000 (iv) Solving Cb = Cma, the decision for change over between Buy & Make-A, 12 x = 7.5 x + 90,000 => x = 90,000 / 4.5 = 20,000 Solving Cma = Cmb , decision for change over between Make-A & Make-B 7.5 x + 90,000 = 5 x + 350,000 => x = 260,000 / 2.5 = 104,000 Solving Cma = Cmc , decision for change over between Make-A & Make-C 7.5 x + 90,000 = 0.5 x + 930,000 => x = 840,000 / 7 = 120,000 Solving Cmb = Cmc , decision for change over between Make-B & Make-C, 5 x + 350,000 = 0.5 x + 930,000 => x = 580,000 / 4.5 = 129,000 Ans (i) :For annual production less than 20,000 pieces, best option is BUY For annual production between 20,000 & 104,000, best option is MAKE A For annual prodn between 104,000 & 129,000, best option is MAKE B For annual production above 129,000, best option is MAKE C.

Solution 1

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Buy or Make

(ii)

production 10,000 pieces per month = 120,000 pieces per year. The best option for this range, by decision rule found earlier, is make B, with lowest cost = 5.0 x + 350,000 = 5 x 120,000 + 350,000 = 600,000 + 350,000 = Rs 950,000 per year