(Outsourcing)
Pneu Shoe Company manufactures various types of athletic shoes. Several types require a built-in air pump. Presently, the company makes all air pumps it requires. However, management is evaluating an o?er from Ram Air Co. to provide air pumps at a cost of $3.60 each. Pneu Shoe's management has estimated that the variable production costs of the air pump total $2.70 per unit and that the company could avoid
$27,000 per year in ?xed costs if it purchased rather than produced the air pumps.
a. If 25,000 pumps per year are required, should Pneu Shoe make them or buy them from Ram Air Co.?
b. If 60,000 pumps per year are required, should Pneu Shoe make them or buy them?
c. Assuming that all other factors are equal, at what level of production would the company be indi?erent between making and buying the pumps?