FINANCIAL ACCOUNTING
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Buy P 1-P Low Cost High Cost Purchase Cost C1 = 35,000+ 0.08 x 2,500,000 C2 = 35,000+ 0.12 x 2,500,000 C3 = 200,000
Transcribed Image Text:An organization requires 2.5 million pieces of a specific component. The firm can attempt to make it internally (design and manufacture) or purchase it externally
MAKE
Based on relative frequency analysis with similar components in the "make" decisions, the probability P of a part with a low cost C1 is 0.38. Otherwise, it will cost C2. The
low cost C1 is 8 cents per unit, while the higher cost C2 is: 12 cents per unit. Both outcomes involve a fixed setup investment of $35,000.
BUY
if they purchase the part, the non-recoverble expenses and variable part costs total $200,000 on the latest vendor quote.
The procurement team must decide between the two decision alternatives. To provide management greater insight, determine the difference between the expected value of
Make and Purchase cost decision alternatives (Make minus Buy) instead of just rendering a Make or Buy final decision Round your answer to the nearest dollar, if
applicable Do not enter the $ symbol
Make
Buy
Low Cost
High Cost
Purchase Cost
C1 =35,000+ 0.08 x 2,500,000
C2=35,000+ 0.12 x 2,500,000
C3-200,000
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