Question

14.5. Given the following costs, which process should be used for an order of 400 pieces of a given part? What will be the unit cost for the process selected?
Order size		400
	Buy	Process A	Process B
Setup		$40.00	$130.00
Tooling		$15.00	$20.00
Labor/unit		$4.10	$3.80
Material/unit		$2.00	$2.00
Purchase cost	$6.10
Fixed cost
Varaible cost
Total cost
Unit cost

Answer 1

We find total cost for each alternative in Excel as shown below;

Here, Set-up and tooling costs are fixed cost, Labor and material costs are variable costs.

As seen from above, the lowest per-unit cost is for the Buy option.

Hence, Buy option should be used for an order of 400 pieces of a given part. The unit cost for the process selected = $6.10

The above solution in the form of formulas is shown below for better understanding and reference:

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