Question

Waterways has discovered that a small fitting it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.82 per unit. Waterways has fixed costs at $0.20 per unit that cannot be eliminated by buying this unit. Waterways needs 456,000 of these units each year. If Waterways decides to buy rather than produce the small fitting, it can devate the machinery and labor to making a timing unit it now buys from another company. Waterways uses approximately 600 of these units each year. The cost of the unit is $12.08. To aid in the production of this unit, Waterways would need to purchase a new machine at a cost of $2,367, and the cost of producing the units would be $9.60 a unit. Without considering the possibility of making the timing unit, evaluate whether Waterways should buy or continue to make the small filling. The company should the fitting. Incremental cast /(savings) will be $ e Textbook and Media What is Waterways'opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit? The opportunity cost is $ eTextbook and Media Would it be wise for Waterways to buy the fitting and manufacture the timing unit? The company should small fittings and the timing units. eTextbook and Media

Answer 1

1.Should make, Incremental cost of buying = 0.02*456,000 = $9,120

as fixed costs are unavoidable

2.The opportunity cost is the extra cost of buying small fitting i.e. $9,120

3.Net benefit of manufacturing timing unit = (12.08-9.60)*600-2367 - 9120

i.e. -$9,999

Should manufacture small fitting and buy timing units