Waterways has discovered that a small fitting it now manufactures at a unit cost of $1.00 could be bought elsewhere for $0.81 per unit. Waterways has unit fixed manufacturing costs of $0.20 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 unit cost of producing the units would be $10.20.
Waterways has discovered that a small fitting it now manufactures at a unit cost of $1.00 could be bought elsewhere for $0.81 per unit. Waterways has unit fixed manufacturing costs of $0.20 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 unit cost of producing the units would be $10.20.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Waterways has discovered that a small fitting it now manufactures at a unit cost of $1.00 could be bought elsewhere for $0.81 per
unit. Waterways has unit fixed manufacturing costs of $0.20 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 unit cost of producing the units
would be $10.20.
Transcribed Image Text:Without considering the possibility of making the timing unit, evaluate whether Waterways should buy or continue to make the
small fitting.
The company should
What is Waterways' opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit?
The opportunity cost is
the fitting. Incremental cost / (savings) will be $
Would it be wise for Waterways to buy the fitting and manufacture the timing unit?
The company should
small fittings and
the timing units.
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