Waterways has discovered that a small fitting it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.81 per unit. Waterways has fixed costs of $0.20 per unit that cannot be eliminated by buying this unit. Waterways needs 476,000 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 $13.22. To aid in the production of this unit, Waterways would need to purchase a new machine at a cost of $2,334, and the cost of producing the units would be $10.20 a unit.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Waterways has discovered that a small fitting it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.81 per unit. Waterways has fixed costs of $0.20 per unit that cannot be eliminated by buying this unit. Waterways needs 476,000 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 $13.22. To aid in the production of this unit, Waterways would need to purchase a new machine at a cost of $2,334, and the cost of producing the units would be $10.20 a unit.

Your answer is partially correct.
Without considering the possibility of making the timing unit, evaluate whether Waterways should buy or continue to make the
small fitting.
The company should make the fitting. Incremental cost / (savings) will be $
X Your answer is incorrect.
What is Waterways' opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit?
The opportunity cost is
%24
Transcribed Image Text:Your answer is partially correct. Without considering the possibility of making the timing unit, evaluate whether Waterways should buy or continue to make the small fitting. The company should make the fitting. Incremental cost / (savings) will be $ X Your answer is incorrect. What is Waterways' opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit? The opportunity cost is %24
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