Hahn Manufacturing purchases a key component of one ofits products from a local supplier. The current purchase priceis $1,500 per unit. Efforts to standardize parts succeededto the point that this same component can now be used infive different products. Annual component usage should in-crease from 150 to 750 units. Management wonders whetherit is time to make the component in-house rather than tocontinue buying it from the supplier. Fixed costs would in-crease by about $40,000 per year for the new equipment andtooling needed. The cost of raw materials and variable over-head would be about $1,100 per unit, and labor costs wouldbe $300 per unit produced.a. Should Hahn make rather than buy?b. What is the break-even quantity?c. What other considerations might be important?
Hahn Manufacturing purchases a key component of one of
its products from a local supplier. The current purchase price
is $1,500 per unit. Efforts to standardize parts succeeded
to the point that this same component can now be used in
five different products. Annual component usage should in-
crease from 150 to 750 units. Management wonders whether
it is time to make the component in-house rather than to
continue buying it from the supplier. Fixed costs would in-
crease by about $40,000 per year for the new equipment and
tooling needed. The cost of raw materials and variable over-
head would be about $1,100 per unit, and labor costs would
be $300 per unit produced.
a. Should Hahn make rather than buy?
b. What is the break-even quantity?
c. What other considerations might be important?
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