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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.

Principles of Accounting Volume 2
Principles of Accounting Volume 2
19th Edition
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax
Chapter10: Short-term Decision Making
Section: Chapter Questions
Problem 4EB: Dimitri Designs has capacity to produce 30,000 desk chairs per year and is currently selling all...
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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.
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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