Question:Waterways Continuing Problem 07 (Part 2)
Waterways has discovered that a small fitting it now
manufactures...
Question
Waterways Continuing Problem 07 (Part 2)
Waterways has discovered that a small fitting it now
manufactures...
Waterways Continuing Problem 07 (Part 2)
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 of $0.20 per unit
that cannot be eliminated by buying this unit. Waterways needs
450,000 of these units each year.
If Waterways decides to buy rather than produce the small fitting,
it can devote 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 $12.26. To aid in
the production of this unit, Waterways would need to purchase a new
machine at a cost of $2,344, and the cost of producing the units
would be $9.70 a unit.
Without considering the possibility of making the timing unit,
evaluate whether Waterways should buy or continue to make the small
fitting.
The company should
buymake
the fitting. Incremental cost / (savings) will be $
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What is Waterways’ opportunity cost if it chooses to buy the
small fitting and start manufacturing the timing unit?
The opportunity cost is
$
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Would it be wise for Waterways to buy the fitting and
manufacture the timing unit?