Question
A manufacturing firm plans to introduce a product that will incorporate a new mechanical part. The firm has to decide whether to make or buy
A manufacturing firm plans to introduce a product that will incorporate a new mechanical part. The firm has to decide whether to make or buy the new parts. The product will have a life of 3 years, and the firm has a demand for 10,000 parts per year. The make option requires an initial investment of $1,000,000 for tooling and production costs of $50,000 per year (paid at the end of each year). The buy option costs the firm $40 per part (price charged by the supplier) and requires paying the supplier for the parts at the end of each year. The firm's minimum attractive rate of return (MARR) is 10% per year.
a) Using annual equivalence analysis, determine whether the firm should make or buy the parts.
b) What price per part would the supplier have to charge (to the nearest dollar) for there to be no economic difference between the two options?
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