question archive 1) “A component part should be purchased whenever the purchase price is less than its total manufacturing cost per unit
1) “A component part should be purchased whenever the purchase price is less than its total manufacturing cost per unit
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1) “A component part should be purchased whenever the purchase price is less than its total manufacturing cost per unit.” Do you agree? Why?
2) ???????“Managers should always buy inventory in quantities that result in the lowest purchase cost per unit.” Do you agree? Why?
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Answer:
1.
No. Some of the total manufacturing cost per unit of a product may be fixed and, hence, will not differ between the make and buy alternatives. These fixed costs are irrelevant to the make-or-buy decision. The key comparison is between purchase costs and the costs that will be saved if the company purchases the component parts from outside plus the additional benefits of using the resources freed up in the next best alternative use (opportunity cost). Furthermore, managers should consider nonfinancial factors such as quality and timely delivery when making outsourcing decisions.
2.
No. When deciding on the quantity of inventory to buy, managers must consider both the purchase cost per unit and the opportunity cost of funds invested in the inventory. For example, the purchase cost per unit may be low when the quantity of inventory purchased is large, but the benefit of the lower cost may be more than offset by the high opportunity cost of the funds invested in acquiring and holding inventory.
