Question
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?
Multiple choice question.
Buy — $80,000 advantage.
Continue to make — $140,000 advantage.
Buy — $20,000 advantage.
Continue to make — $60,000 advantage.
Multiple choice question.
Buy — $80,000 advantage.
Continue to make — $140,000 advantage.
Buy — $20,000 advantage.
Continue to make — $60,000 advantage.
Answers
GPT-4o mini
To determine whether Andrews Co. should make or buy the part, we need to compare the costs and the opportunity costs of both options.
### Costs of Making the Part
1. **Relevant Manufacturing Costs**: $15 per unit
2. **Total Cost to Make 20,000 Units**:
\[
20,000 \text{ units} \times 15 \text{ per unit} = 300,000 \text{ total cost}
\]
### Costs of Buying the Part
1. **Purchase Cost**: $18 per unit
2. **Total Cost to Buy 20,000 Units**:
\[
20,000 \text{ units} \times 18 \text{ per unit} = 360,000 \text{ total cost}
\]
### Opportunity Cost
If they buy the part, they can utilize the space to produce another product that will generate a segment margin of **$80,000** per year.
### Analysis
- **Total Cost to Make the Part**: $300,000
- **Total Cost to Buy the Part**: $360,000
- **Opportunity Gain from Buying**: $80,000
### Decision Calculation
1. **If they make the part**:
- Cost = $300,000
- Opportunity Cost = $0
- **Net Gain** = $300,000
2. **If they buy the part**:
- Cost = $360,000
- Opportunity Gain from using the space = $80,000
- **Effective Cost** = $360,000 - $80,000 = $280,000
### Conclusion
The effective cost if they buy the part is lower than the cost of making the part.
### Evaluation of Options
- **By continuing to make**: Costs $300,000
- **By buying the part and realizing the opportunity**: Effective cost of $280,000
In terms of the advantage:
- Making results in a cost of $300,000.
- Buying gives an effective cost of $280,000.
The savings when buying compared to making is:
\[
300,000 - 280,000 = 20,000
\]
Thus, the conclusion is:
**Buy — $20,000 advantage.**
### Costs of Making the Part
1. **Relevant Manufacturing Costs**: $15 per unit
2. **Total Cost to Make 20,000 Units**:
\[
20,000 \text{ units} \times 15 \text{ per unit} = 300,000 \text{ total cost}
\]
### Costs of Buying the Part
1. **Purchase Cost**: $18 per unit
2. **Total Cost to Buy 20,000 Units**:
\[
20,000 \text{ units} \times 18 \text{ per unit} = 360,000 \text{ total cost}
\]
### Opportunity Cost
If they buy the part, they can utilize the space to produce another product that will generate a segment margin of **$80,000** per year.
### Analysis
- **Total Cost to Make the Part**: $300,000
- **Total Cost to Buy the Part**: $360,000
- **Opportunity Gain from Buying**: $80,000
### Decision Calculation
1. **If they make the part**:
- Cost = $300,000
- Opportunity Cost = $0
- **Net Gain** = $300,000
2. **If they buy the part**:
- Cost = $360,000
- Opportunity Gain from using the space = $80,000
- **Effective Cost** = $360,000 - $80,000 = $280,000
### Conclusion
The effective cost if they buy the part is lower than the cost of making the part.
### Evaluation of Options
- **By continuing to make**: Costs $300,000
- **By buying the part and realizing the opportunity**: Effective cost of $280,000
In terms of the advantage:
- Making results in a cost of $300,000.
- Buying gives an effective cost of $280,000.
The savings when buying compared to making is:
\[
300,000 - 280,000 = 20,000
\]
Thus, the conclusion is:
**Buy — $20,000 advantage.**