Reference no: EM133071159
Question - Motown Manufacturing makes trumpets and other fine musical instruments. Motown currently is deciding whether to buy 100 units of a component for piccolos from an outside supplier or to make them in-house. The status quo option of doing nothing is not feasible-Motown will either buy the component or make the component.
If Motown buys the component from an outside supplier, it will pay the supplier $500 per unit. Motown will also pay $50 per unit to inspect the component and spend an additional $400 per unit in materials and labor to convert each component into a finished product. Motown sells the finished piccolos to consumers for $1,500 each.
Making the component in-house requires $200 worth of brass and $175 worth of a special wood per component. Motown routinely purchases and uses brass in its operations, and it does not currently have any brass in inventory. The special wood is unique to the component in question, and Motown currently has $10,000 worth in stock. Motown will dispose of the special wood (at a net value of zero) if the company pursues the buy option. Making the component in-house also requires labor at a cost of $25 per hour. It takes employees 10 hours to make one component.
As under the buy option, Motown will pay $50 per unit to inspect the component if it is made in-house and spend an additional $400 per unit in materials and labor to convert each component into a finished product. Motown will then sell the finished piccolos to consumers for $1,500 each.
Required - Answer the following questions:
What are the relevant costs and benefits associated with the make option?
What are the relevant costs and benefits associated with the buy option? Make or buy?
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