Answer:
From the analysis below, the cheapest option is option 2 which is to produce the machine part at $263.33 per unit using using standard lathe. Therefore, the method that should be used is to make the part on a standard lathe.
Explanation:
This can be determined by comparing the total cost per unit of the machine part of each of the options and select the lowest as follows:
Option 1: Purchase of the part
Total cost per unit if purchase = $350
Option 2: Total cost per unit using standard lathe
This can be calculated as follows:
Demand = 750 units
Cost per unit (including materials) of making the part on standard lathe = $250 per unit
Acquisition cost of a standard lathe = $10,000
Acquisition cost per unit of a standard lathe = Acquisition cost of a standard lathe / Demand = $10,000 / 750 = $13.33
Total cost per unit of standard lathe = Cost per unit (including materials) of making the part on standard lathe + Acquisition cost per unit of a standard lathe = $250 + $13.33 = $263.33 per unit
Option 3: Total cost per unit using numerically controlled lathe
This can be calculated as follows:
Demand = 750 units
Cost per unit (including materials) of using numerically controlled lathe = $150 per unit
Acquisition cost of a numerically controlled lathe = $100,000
Acquisition cost per unit of a numerically controlled lathe = Acquisition cost of a using numerically controlled lathe / Demand = $100,000 / 750 = $133.33
Total cost per unit of numerically controlled lathe = Cost per unit (including materials) of using numerically controlled lathe + Acquisition cost per unit of a numerically controlled lathe = $150 + $133.33 = $283.33 per unit
Option 4: Total cost per unit using machining center
This can be calculated as follows:
Demand = 750 units
Cost per unit (including materials) of using machining center = $50 per unit
Acquisition cost of a machining center = $350,000
Acquisition cost per unit of a machining center = Acquisition cost of a using machining center / Demand = $350,000 / 750 = $466.67
Total cost per unit of machining center = Cost per unit (including materials) of using machining center + Acquisition cost per unit of a machining center = $50 + $466.67 = $516.67 per unit
Conclusion
From the above, the cheapest option is option 2 which is to produce the machine part at $263.33 per unit using using standard lathe. Therefore, the method that should be used is to make the part on a standard lathe.
