Merrimac Manufacturing Company has always purchased a certain component part from a supplier on the East Coast for $50 per part. The supplier is reliable and has maintained the same price structure for years. Recently, improvements in operations and reduced product demand have cleared up some capacity in Merrimac’s own plant for producing component parts. The particular part in question could be produced at $40 per part, with an annual fixed investment of $25,000. Currently, Merrimac needs 300 of these parts per year.
A) Should Merrimac make or buy the component part?
B) As another alternative, a new supplier located nearby is offering volume discounts for new customers of $50 per part for the first 100 parts ordered and $45 per part for each additional unit ordered. Should Merrimac make the component in-house, buy it from the new supplier, or stick with the old supplier?
C) Would your decision change if Merrimac’s annual demand increased to 2000 parts? increased to 5000 parts?
D) Develop a set of rules that Merrimac can use to decide when to make this component, when to buy it from the old supplier, and when to buy it from the new supplier.