Chattanooga Development Company has learned that a small rubber O-ring it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.82 per unit. The Company has fixed costs of $0.20 per unit that connot be eliminated by buying the rubber O-ring. The Company produces 460,000 of these O-rings each year. If Chattanooga Development Company decides to buy rather than produce the rubber O-rings, it can devote machinery and labor to making a heat sensor that it currently buys from another company. The Company needs 500 heat sensors each year, and the cost to buy the heat sensors is $12.66 each. The cost of making each heat sensor would be $9.90. INSTRUCTIONS: a) For this part, use only the information in the first paragraph and do not consider the possibility of making the heat sensors. Prepare the analysis to evaluate whether the Company should buy or continue to make the rubber O-rings. b) Prepare a calculation of the Company's opportunity cost if it decides to buy the rubber O-rings and begin making the heat sensors. c) Prepare the analysis to evaluate whether the Company should buy or make the rubber O-rings assuming that the Company would begin making the heat sensors if it bought the rubber O-rings. Indicate what the Company should do.
Chattanooga Development Company has learned that a small rubber O-ring it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.82 per unit. The Company has fixed costs of $0.20 per unit that connot be eliminated by buying the rubber O-ring. The Company produces 460,000 of these O-rings each year. If Chattanooga Development Company decides to buy rather than produce the rubber O-rings, it can devote machinery and labor to making a heat sensor that it currently buys from another company. The Company needs 500 heat sensors each year, and the cost to buy the heat sensors is $12.66 each. The cost of making each heat sensor would be $9.90. INSTRUCTIONS: a) For this part, use only the information in the first paragraph and do not consider the possibility of making the heat sensors. Prepare the analysis to evaluate whether the Company should buy or continue to make the rubber O-rings. b) Prepare a calculation of the Company's opportunity cost if it decides to buy the rubber O-rings and begin making the heat sensors. c) Prepare the analysis to evaluate whether the Company should buy or make the rubber O-rings assuming that the Company would begin making the heat sensors if it bought the rubber O-rings. Indicate what the Company should do.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Qw.141.
Transcribed Image Text:Chattanooga Development Company has learned that a small rubber O-ring it now manufactures at a cost of $1.00 per
unit could be bought elsewhere for $0.82 per unit. The Company has fixed costs of $0.20 per unit that connot be
eliminated by buying the rubber O-ring. The Company produces 460,000 of these O-rings each year.
If Chattanooga Development Company decides to buy rather than produce the rubber O-rings, it can devote machinery
and labor to making a heat sensor that it currently buys from another company. The Company needs 500 heat sensors
each year, and the cost to buy the heat sensors is $12.66 each. The cost of making each heat sensor would be $9.90.
INSTRUCTIONS:
a) For this part, use only the information in the first paragraph and do not consider the possibility of making the heat
sensors. Prepare the analysis to evaluate whether the Company should buy or continue to make the rubber O-rings.
b) Prepare a calculation of the Company's opportunity cost if it decides to buy the rubber O-rings and begin making
the heat sensors.
c) Prepare the analysis to evaluate whether the Company should buy or make the rubber O-rings assuming that the
Company would begin making the heat sensors if it bought the rubber O-rings. Indicate what the Company should do.
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