-Firms facing a continue-to-make or buy decision for a component must evaluate marginal costs of the decision.
-The decision to buy will depend on whether the firm can utilize the released machinery capacity profitably or not.
-If machinery will become idle, then fixed [sunk] costs become irrelevant and only variable costs should be compared to the buy price in the analysis.
-If, on the other hand, machinery does not become idle, but will be used profitably elsewhere, then both variable and fixed costs should be compared to the buy price.
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- Manufacture Mustard in-house [Mustard = important ingredients in many foods]
-Originally purchased from an outside vendor
-30 years in business [Thain Foods Limited], include syrups, fudges, cone dips, salad dressings
-North America and Europe
-Supply Operations [Invest 2 Mill]
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-Purchasing divided into five different types [Labels, packaging, raw material, commodities, and MRO supplies]
-Mustard important raw material used in many TFL's products
-Purchasing mustard externally:
+ When mustard needed - Buyer emailed the supplier/requested that it be prepared for the amount and picked up
by a truck
-Manufacturing In-house: 60% solid, 20% water, 20% vinegar
Needed spice blend: supplier could do so for them at $0.15 per liter
Vinegar cost per liter $0.1875
Water cost per liter $0.025
Total overhead cost for labor/production per liter of mustard: $0.105
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