Intermed iate: Calculation of EOQ and a make or buy deci sion A company is cons1dering the possibility of purchasing from a supplier a component it now makes. The supplier will provide the components in the necessary quantities at a unit price of £9.

Transportation and storage costs would be negligible.

The company produces the component from a single raw material in economic lots of 2000 units at a cost of £2 per unit Average annual demand is 20000 units. The annual holding cost1s

£0.25 per unit and the minimum stock level is set at400 units.

Direct labour costs for the component are £6 per unit, fixed manufacturing overhead is charged at a rate of £3 per unit based on a normal activity of 20 000 units. The company also hires the machine on which the components are produced at a rate of £200 per month.

Should the company make the component?