Senior Company Currently Buys 35,000 Units of a Part Used

question 99

Essay

Senior Company currently buys 35,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20 percent increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 35,000 units):
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.
Required:
Should Senior Company buy the part externally or make it internally?

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Definitions:

Continuous Reinforcement

This is a learning process in behavior modification where a reward follows every correct response, enhancing the likelihood of the behavior being repeated.

Negative Reinforcement

A behavioral psychology term where the removal of an undesirable outcome strengthens a specific behavior.

Partial Reinforcement

A conditioning schedule where responses are only occasionally reinforced, making the learned behavior more resistant to extinction.

Punishment

A concept in behavior psychology that involves the introduction of an unpleasant stimulus or the removal of a pleasant one following an undesired behavior, with the intention of decreasing that behavior.