A manufacturer has three options for a component that they sell as spare part -
a) buy it from a supplier for $100 apiece,
b) manufacture it in house using spare capacity at incurring a fixed charge of $100,000 or
c) buying a specialized machine for $250 000 to produce parts for $15 apiece.
a) What cost elements do you think go to make up the $20/unit and $15/unit cost? Which element do you think contributes to the difference?
b) For what values of anticipated demand are the three methods optimal?
c) Spare Parts Sales has estimated a demand of 10,000 units for this legacy item. If the selling price is $125 per piece what is the expected profit?