John Morton, Director of Materials Management for Computer Products Corporation

Essay

John Morton, director of materials management for Computer Products Corporation (CPC) in San Jose, is reviewing next year's plans for the supply of a component that is purchased from Osiega Ltd., a company in Japan. The component is the PS100 power supply assembly that is used in many of CPC's products.CPC pays the supplier more than $7 million per year for these units, and John wonders if money could be saved by developing another supplier for this component or if CPC should gear up to manufacture the power supply assemblies in-house within one of CPC's own production plants.John's purchasing-analysis staff has developed the following estimates:
$\begin{array}{|l|l|l|l|}\hline\text { Supply Source } & & \text { Annual } & \text { Variable Cost } \\\hline \text { for PS100 } & \text { Description of Cost } & \text { Fixed Cost } & \text { per Unit } \\\hline \text { Osiega Ltd. } & \text { Annual tooling } & \$ 50,000 & \\\hline & \text { Inspection and rework } & & \$ 0.16\\\hline & \text { Shipping } & & \$ 0.95 \\\hline & \text { Purchase price } & & \$11.88\\\hline \text { Atlanta Spier } & \text { Annual tooling } & \$ 95,000 & \\\hline & \text { Inspection and rework } & & \$ 1.05 \\\hline & \text { Shipping } & & \$ 0.15 \\\hline & \text { Purchase price } & & \$ 10.59 \\\hline \text { In-house } & \text { Annual tooling } & \$ 70,000 & \\\hline & \text { Inspection and rework } & & \$ 0.55 \\\hline & \text { Shipping } & & \$ 0.25 \\\hline & \text { Production costs } & \$ 5,000 & \$ 11.50 \\\hline\end{array}$ The purchasing-analysis group has learned that CPC will need about 550,000 of the PS100 units next year.
a.Which supply source provides the least cost for next year?
b.How many PS100 units would have to be bought next year for each of the sources to be the least-cost source?